The Chinese market has performed poorly in recent years, and valuations are low. Last week Simon Edelsten, manager of the Artemis Global Select fund, said that he was upping his weighting to China to benefit from this, saying the country could potentially be the “next Japan”.
However, Robertson says India is more likely to play this role, with it difficult for companies to grow in the fiercely competitive Chinese domestic economy.
“Is now the time to invest with China's economy in the doldrums? There are some attractive valuations at first glance but it is worth considering the level of competition that exists in areas like retail and the automotive sector,” Robertson said.
“There is currently fierce discounting across these sectors, foreign competition, combined with operational deleveraging, has left many businesses with very little margin.”
“Those with good balance sheets will be able to survive until any economic recovery but it is unlikely the competition will relent, this makes the next profit cycle weaker than the last. There are now over 200 hypermarkets in Shanghai.”
Robertson runs the £14.5m Somerset Global Emerging Markets Fund, and is co-manager on the £205m Somerset Emerging Markets Dividend Growth fund.
Somerset Global Emerging Markets has made 17.24 per cent over the past three years as the MSCI Emerging Markets index has made 12.94 per cent, according to data from FE Analytics.
Performance of fund versus index and sector over 3yrs
Source: FE Analytics
The fund has just 8.8 per cent in China compared to 18 per cent of the benchmark, and the manager says he expects the country to continue to under-perform.
“Is it a coincidence that labour demand in China started outstripping supply in 2009 and GDP has been on a downward trajectory since then?” he said.
“Return on capital employed plus return on invested capital has also fallen off dramatically.”
“In China, inflation is much higher than the reported number. This is why the authorities are looking to cool spending.”
The fund has 8.9 per cent in India compared to the 6.53 per cent of the index, and Robertson says he is shifting his fund to focus more on the country, which is better-placed to see valuations recover.
“One opportunity now is in the unpopular market of India (in a similar position to China). Price to book multiples are low, even accounting for a lower return on equity but in China fierce competition is driving down returns quicker than in India,” he said.
“We have added a position in Coal India to the portfolio,” he added. “We feel that the valuation justifies the investment and the asset is a strong business even though state owned and doing 'national service' by selling its coal at a discount to international prices (between 20 per cent and 40 per cent).”
“It provides 80 per cent of India's coal needs and coal is still, and will remain, India's prime energy source for the foreseeable future. 90 per cent of its coal comes from open pit mines, meaning it is a low cost producer.”
“Yes the Indian power sector is chaotic but Coal India is paid on time as power companies are keen to secure supply; Coal India continues to invest its ample free cash into growing production.”
“The company generates a 35 per cent return on equity, has net cash on its balance sheet and trades in line with industry peers.”
“Because of its profitability, generated by having a monopoly and long reserve life, it should trade at a premium.”
One of the best performing markets in recent years has been Thailand.
The Stock Exchange of Thailand (SET) has made 58.37 per cent in the past year alone, according to data from FE Analytics, while it is up 149.81 per cent over three years.
Performance of index over 1yr
Source: FE Analytics
The manager says he is concerned about valuations after such a good run, and is trimming his holdings to the country, which currently makes up 4.8 per cent of the fund.
“Optimism is high in Thailand and valuations are expensive, in some cases very expensive. It is not clear when the economy will slow down, but with zero unemployment, inflation will come.”
“There is no obvious bubble in property and there is still scope for increased mortgage and SME lending but the strong baht is hurting exporters.”
“At some point the Bank of Thailand, which has been a decent custodian of the economy so far, will want to cool things.”
The manager has cut his position in Krung Thai Bank on valuation grounds, and has also trimmed back on Indonesian company Semen Gresik .
He says that one huge takeover bid demonstrates warning signs of an over-heating Thai economy.
“In Thailand the CP Group announced a $6bn bid for Siam Makro, essentially a convenience store format tying up with a discount store format.”
“The price offered valued the business at 40 times earnings and CP's management spoke of huge synergies and the wish to roll out Makro stores regionally and in China.”
“They are overpaying for the business and with it blowing out plenty of hot air about what they hope to achieve.”
Samir Mehta, manager of the £50m JOHCM Asia ex Japan fund is another to put his faith in India rather than China.
The manager has 25.7 per cent in India compared to 8.9 per cent of the benchmark, while he is 2.1 percentage points underweight China.
Aberdeen Global Emerging Markets is also overweight India and underweight China, although the fund has soft-closed to new investors.
Somerset Global Emerging Markets has a minimum initial investment of £2,000 and has ongoing charges of 1.85 per cent.