'Why don't you take up fishing instead' and 'boring article, boring ideas' were about the most repeatable postings to my recent blogpost painting a world bereft of exciting new ideas.Well, in response to my beloved troll, here's an idea from our recent trip to Hong Kong – buy Chinese equities.
Given the ubiquitous and fashionable dislike of anything Dragon-related there is obviously the potential for this suggestion to stoke the fires of ire amongst our investment managers, our introducers of clients and our clients themselves.
Performance of indices over 3yrs
Source: FE Analytics
It might even have my troll choking on his lunchtime sandwich and furiously reaching for his keyboard. So before we return in future weeks to discuss the investment merits of such a decision and why the timing might be appropriate, here is our riposte to the core common complaints concerning China.
Bear point number 1: The economy is collapsing under the weight of bad debts
Undoubtedly the inefficiencies of the 2008 stimulus and the enforced lending from the banking sector have led to a surge on non-profitable loans and this is weighing on the economy.
However, the "Lehmans moment" that the press and financial commentators in the West are calling for is not coming. The Chinese leadership has read the situation well and opted for stability over pain.
This might take longer for an ultimate conclusion but the path will be smoother.
The property sector needs to cool further, but we are not forecasting a ruinous collapse and believe this is just another traditional cycle downswing.
Bear point number 2: China's growth potential is greatly reduced
Here we have some sympathy with the legion of growling bears stalking the Middle Kingdom, but choose to flip the argument on its head and believe this to be bullish.
Longer-term the Chinese government have opted for slower, better balanced growth, focused on domestic consumption instead of inefficient fixed asset splurges.We'll have a bit of that thanks.
We expect sustainable Chinese growth to be in the region of 5 per cent within a couple of years, but believe that this will be better quality growth and perfectly sufficient to keep unemployment low enough for the 'harmonious society' so desired by the Communist leadership.
Of course, it would be naïve to suggest that the growth trajectory will be perfectly smooth, but the growth challenges are reflected in asset prices.
Bear point number 3: Infighting in the Communist party will create chaos
Let's give Xi Jinping the credit he is due; his ability to cement control in the last 18 months has been sensational.
His increasingly Stalinist purges have reduced the risk of revolt as his enemies are so reduced in number, and his ability to impose his refreshingly reformist agenda is enhanced.
In the short-term there is clearly the risk that the crackdown on corruption and cleansing of the political Augean Stables poses a risk to growth – not least as officials will be scared to do anything in case of scrutiny – but this has been recognised and that is why we have recently seen targeted stimuli focusing on key projects such as railways and lending to the small and medium corporate sector.
Xi has grasped the mandate for change with both hands and is striving for success. So far you have to say he has done a good job.
The economic risks to China certainly remain and certain opaque elements, particularly in the banking and shadow finance sectors, deserve a great deal of investigation, but we think writing off China is a perilous move and ignoring the deep contrarian value opportunity in certain Asian value prospects would be an easy mistake to make – particularly when other opportunities to make attractive returns in the next few years are so scarce.
Let the trolling begin.
Becket (pictured on page one) has been buying Christina Chung’s $480m Allianz China Equity fund and Andrew Swan’s BlackRock Global Funds Asian Growth Leaders fund for his clients.
The notes that the latter has a significant overweight in China, and is targeting the deep value areas he is most interested in.
Swan took over the $109m fund in November 2012, and performance has been very strong since.
Performance of fund and index since Nov 2012
Source: FE Analytics
FE data shows the fund has returned more than 31 per cent, compared to 11.42 per cent from the MSCI Asia Pacific ex Japan index.
As well as running client portfolios, Becket is chief investment officer at Psigma.