The economic slowdown in China, along with other factors such as a recovery in the developed world, has caused sentiment towards the country’s equity markets to turn negative over the past few years.
This has translated into a difficult period for equity investment. Our data shows that while the MSCI World has returned more than 20 per cent so far this year, the MSCI China is up just 2.73 per cent.
Performance of indices year to date
Source: FE Analytics
Ventre (pictured), who is head of multi-manager at Old Mutual, says he has been upping his exposure to the region because it is so cheap and because if fears over the eurozone crisis, the US debt ceiling or the tapering of QE spark a sell-off, Chinese equities would be unharmed.
"China can actually be a safe-haven in this environment," Ventre said.
"It is so under-owned that if you start to worry about the US and its debt ceiling or about everything else, you could get some sort of forced liquidation at some point. If that were to happen, it wouldn’t affect China: nobody is going to be liquidating China as no-one owns it," he added.
Although the manager is using this dip in the market as a buying opportunity, he is baffled as to why investors sold down their exposure to China in the first place.
"This looks like an overreaction to us: Chinese earnings have proved to still be there in this environment and in that context seeing Chinese equities trade down to one-times book doesn’t really make sense," he said.
One of the major long-term concerns surrounding China is that it could be heading towards a Japanese-style lost decade of crippling deflation due to overcapacity. Ventre understands why investors may be concerned, but says they are missing the point.
"The most common bearish argument I hear about China is that it is just like Japan: that it has a huge demographic problem and that it will all end in the same deflationary-mired situation Japan has been in. I kind of agree that China is a good model for Japan and if you grant that premise, then you want to own China."
"That may seem counterintuitive, but we are 20 years before China runs into that stage of being like Japan," he added.
The manager is confident that over that next 20-year period, investors will see very high returns from Chinese equities.
"If you look at the period between the mid-1950s to the early 1970s, Japan’s GDP average was close to 10 per cent per annum. It was building a lot of infrastructure, it was going through an industrial revolution and its society and economy were opening up to foreign influences and cultures."
"Does that ring a bell? It is exactly what is happening in China," he added.
However, the manager says that as the Japanese economy slowed down to much more sustainable levels, as China is doing right now, it sparked a period of sustained Japanese equity outperformance.
"Slower growth, but better equity performance, and when growth was very high, growth equities were doing nothing? This seems counter-intuitive."
"The reason is that when your GDP is so high and investment is high, there is a lot of money being ploughed into capex and fixed assets. Later in the process when GDP slows, and you’ve built all the fixed assets and you don’t really have any capex left to do, those assets start to pay off."
"Corporate profits go super-charged because you get the double effect of getting the gain from the assets in the first place and from spending less on capex. Unsurprisingly, that drives significant stock market outperformance," he added.
Ventre says Japan went through a 15-year period of significant outperformance before slowing down and he expects Chinese indices to follow suit.
"The story of slower growth to a more sustainable level and a transition to a new economy isn’t a bear story for China, that’s a hugely bullish story," he said.
"Take this time when Chinese equities are weak to add to your exposure," he added.
Ventre say he is using passive exposure to China instead of actively managed funds for the time being, however.
"We own a future, so basically we own the China index. This isn’t going to be a long-term hold, but we take the view that the things that are really cheap are not owned by active managers, like banks for example," he added.
As head of multi-manager at Old Mutual, Ventre heads up the group's Spectrum, Voyager and Generation Target fund ranges.
One of his best performers has been the £1bn Old Mutual Voyager Diversified fund.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It is a top-quartile performer in the IMA Mixed Investment 20%-60% Shares sector over five years with returns of 71.16 per cent, more than 20 percentage points ahead of the average fund in the sector.
The fund requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.96 per cent.
