China has suffered from the negative sentiment towards emerging markets in recent years with investors becoming increasingly concerned about the country’s slowing economic growth and the state of its financial system. Our data shows that while the MSCI AC World index has returned more than 20 per cent over three years, the MSCI China index has lost 9.8 per cent.
Performance of indices over 3yrs
Source: FE Analytics
However Ventre, head of multimanager at Old Mutual, has been upping his exposure to Chinese equities recently and says with valuations at such low he thinks it is one of the safest places to invest in the current environment.
“China looks ridiculously cheap. It is currently priced for collapse and is completely hated by the market,” Ventre said. “However, who would sell it? No-one owns it.”
The consensual view on China is very bearish. A number of experts have highlighted that its economy is in a state of transition from an investment led model to a consumer driven one and therefore investors should expect lower equity returns than they have done in the past.
Performance of indices over 10yrs
Source: FE Analytics
However, Like Psigma’s Tom Becket, Ventre believes that the Chinese authorities are managing previous excesses in the economy and, as a result, says that now is a good time to buy into the market because the chances of full–blown crises are very unlikely.
“I think the government is doing a reasonable job,” Ventre said. “China has had too big a credit boom, or the pace of credit growth has been too fast, and the government have tried to dampen it down.”
“They are doing quite a good job so far and it is very interesting because we can almost afford to be wrong and not lose too much money. However, if we are right then we could have 100 per cent upside – especially from where valuations are. The risk/reward is very good, in our opinion.”
The major risk facing China, according to the region’s bears, is the country’s growing shadow banking sector which is made up largely of wealth-management products offering poorly regulated loans to businesses and consumers.
There has already been short-lived liquidity crises in last year as the SHIBOR [Chinese inter-bank lending rate] spiked, causing concerns about the health of the highly leveraged banking sector and its exposure to a booming property market.
However, Ventre says fears of a banking sector collapse have been overhyped.
“Yes it is a risk, but for us, it isn’t anything evil,” he said. “It is just the function of very tight banking regulation. If you are restricted, then the natural solution is to create an off-balance sheet trust.”
Nevertheless, Ventre does understand why China’s unregulated banking sector is causing such an issue in the market.
He says the real question is whether or not that unregulated credit will be treated as part of the bank or an independent entity. He says the worry is if the banks are forced to cover any bad loans they could be hit with huge losses. However, he doesn’t think that will be the case.
“We are more of the view that the Chinese authorities won’t destroy such a large part of their stock market’s market capitalisation. Yes, there will be a few defaults here and there, there already have been, but I can’t see how there will be a full blown crisis.”
“People keep trying to draw parallels between this and Lehman, but while credit has been growing in China, it still makes up a very small percentage of the economy, unlike in the developed world in 2008.”
Ventre’s views on the state of China’s financial system are similar to those of legendary investor Anthony Bolton, who told FE Trustnet last year that the countries authorities are strong enough to handle the bad debts that are building up.
As Ventre is more bullish on Chinese banks than any other part of the market, he has been buying units in a tracker fund for his exposure instead of going down the active route.
“It’s difficult to buy an active manager who owns banks,” he said. “That’s where we think the value is so at the moment we are using a tracker.”
“However, there are some very poor companies in the index so I wouldn’t advocate using it on a five to 10 year view.”
“We think we can make some money there, but when markets stabilise we will look to use active managers again.”
Ventre has managed fund of funds at Old Mutual since April 2008. According to FE Analytics, over that time he has returned 27.8 per cent to his investors while his peer group composite has returned 22.63 per cent.
Performance of manager vs peers since Apr 2008
Source: FE Analytics
Ventre currently heads up Old Mutual’s Spectrum, Voyager, Generation Target and the newly created Foundation range, which has been launched to cater to the needs of investors and their advisers in the new, post-RDR financial market and regulatory environments.
The range is made up of three actively managed risk targeted funds and the portfolios are split between some of Old Mutual’s high profile managers such as Richard Buxton, Stewart Cowley and Christine Johnson.
