Each week, a professional investor tells MoneyWeek where she’d put her money now. This week: Sandra Crowl, Member of the Investment Committee at Carmignac.
Up until November 2014, the Chinese mainland stockmarket had been in a six-year slump, weighed down by poor corporate earnings, low investment, and excessive debt. Following the first interest-rate cut by the Chinese central bank, that all changed. The government openly encouraged cheaper money to finance investments in the local Shanghai and Shenzhen exchanges, thinking that stock gains would promote growth. Trading accounts multiplied, as did leverage (loading up on debt to buy stocks). There wasn’t a hairdresser or shoe shiner in sight as they abandoned their posts to spend more time punting the bourses.
The Chinese government is determined to stick on its path to becoming a major global power, and that means accelerating the opening up of its capital markets and creating the mechanisms for a more freely floating currency. Several measures have been taken to create deeper and less volatile markets – the Hong Kong Shanghai Connect and new Qualified Foreign Investor licences, for example, encourage further two-way investors’ flows.
The A-share market, open mostly only to Chinese and institutional investors, is now the second biggest in the world, with a capitalisation of $5,000bn. Other Chinese markets, such as the Chinese ADRs (US-listed Chinese companies) and the H-share market (Chinese companies listed in Hong Kong), both amount to another $3,000bn in capitalisation, and both are open to international investors.
The markets are volatile. An investment in the A-share market a year ago would today be sitting on a return of 35%. One made in mid-June, however, would be sitting on losses as steep as 40%. That sounds like the Wild West. But putting the recent volatility aside and the worrisome way in which this was handled by the government – both in the pre- and post-collapse period – there are good, long-term, defensive opportunities in China.
Retail foreign investors can benefit from the long-term structural trends in China, and there is value to be found. Chinese stocks have fallen to attractive historic valuations, well below their peers in developed countries. H-shares trade on a price-to-earnings (p/e) ratio of 7.2. This is half the expense of American and European stocks (p/es of 16 and 15, respectively).
China’s transition from investment-led growth to a more consumption-driven economy has dampened overall growth – to sub-5% levels. But that leaves good opportunities in such sectors as consumer staples and pharmaceuticals. Chinese government’s urbanisation policy, which hopes to achieve a 60% urbanisation rate by 2020, should be great for consumer stocks. It is helping Haier Electronics (Hong Kong: 1169), which makes electrical appliances for consumers, to achieve double-digit earnings growth, for example.
The Chinese consumer is also a world leader in the use of e-commerce and internet services, setting the stage for a multi-year growth path for companies such as Tencent (HK: 700), China’s Amazon. If you’re looking for diversification and long-term growth in margins, it’s best to avoid banks and instead look to investing in insurance. The Chinese consumer and saver will increasingly need insurance products and AIA (HK: 1299), which has a diversified range of such products, stands to benefit. It also generates revenue from other Asian countries, including Singapore.