Investors Look To Emerging Asia For Returns

Emerging Asian markets have continued to rise in August, particularly China.  Investor sentiment towards emerging Asia has improved markedly since Brexit occurred in June.  This marks the first time since we formed Chinus Asset Management in 2008 that investor sentiment towards emerging Asia improved following a global macro crisis.  As the Wall Street Journal reported last month:

Emerging markets aren’t a haven—but they look like a compelling alternative to the bigger concerns that still lie in developed markets.  One month after the Brexit vote, and one week after the Turkish coup attempt, emerging markets show no signs of flagging. In fact, the surprise success story of the year appears to be gathering momentum…  What were headwinds for emerging-market investors are turning into tailwinds. 

Investors have pumped close to $13 billion into emerging-market stock funds over the past six weeks.

 

As a result, emerging market valuations have been recovering from near record lows at the beginning of the year.  They are still substantially less expensive than developed country valuations.

In a world starved for returns, emerging Asia is one of the few regions with both rapid economic growth and attractive valuations. 

China: As the “Emerging Destination” chart in the Asius section above shows, investors continue to be wary of China even as they rush into other emerging markets.  We, on the other hand, have a contrarian view and are bullish on China.  Our outlook is based on several factors:

  • Our managers in China have relatively high earnings growth forecasts for their portfolio companies for 2016 that have not yet shown up in the stock prices.  If their portfolio companies achieve 20-50% earnings growth, as our managers forecast, then stock prices will experience similar gains, assuming valuation multiples remain constant.
  • Chinese market valuations are rebounding off of historic lows but still very attractive.  MSCI China (which primarily track Chinese companies listed in Hong Kong) trades at 11.2x while the CSI300 (Shanghai index) trades at 12.6x.  There is room for multiple expansion as valuations revert back to mean.  
  • The Chinese government announced that the Shenzhen-HK Stock Connect program will begin in Q4.  Foreign investors will have access to 673 Shenzhen-listed companies with total market cap of $1.9 trillion.  Chinese investors will get access to an additional 120 small cap stocks listed in Hong Kong with total market cap of $227 billion.  When the Shanghai-HK Stock Connect program was initiated in late 2014, both onshore and offshore markets surged.  
  • Access to Shenzhen stocks is one of the key remaining hurdles for A-share market inclusion in MSCI indexes.  Goldman Sachs estimates that China’s weight in MSCI indexes will increase substantially over the next two years as A-share market weighting increases.  Each 1% increase of the MSCI Emerging Market index represents $15 billion of inflows into A-shares.

India: Indian markets have recovered strongly since February, pushing up P/E ratios above 20x compared to 17x historical average.  However, the high multiples are less of a concern in India because corporate profits are forecast to grow strongly over the next several years.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC

China Presents Economic Targets for 2016

China’s annual parliamentary session of the National People’s Congress kicked off last week, with Prime Minister Li Keqiang presenting the government’s report on its economic targets for 2016.  

The report indicates three key trends that will affect China’s economy and the direction of its macro policies:

1.     Maintaining Growth is a Top Priority

The government set the growth target for 2016 at between 6.5% and 7%, slightly lower than last year’s level of about 7%. A drop in the GDP target indicates that the government accepts lower growth and will focus more on growth quality. By setting 6.5% as the floor, the government delivered a strong signal that China will not allow a hard landing. 

Notably, the government did not set a target for exports, weakening the argument that its adjustment of the exchange rate policy last year was a competitive devaluation aimed at boosting exports.

To meet its growth target, the fiscal deficit will increase to 3% of GDP, up from 2.3% in 2015. Fiscal support is expected to be limited, with monetary policy continuing to play an important role.  

2.     Infrastructure Investment Remains a Key Tool

The main drag on China’s GDP growth in 2015 stemmed from the 50% y-o-y decline in growth of fixed asset investment ("FAI"), which fell to 10% last year. Most of the slowdown came from property investment, which rose only 2% in 2015. In contrast, infrastructure investment was up 17% last year. It is expected that property investment will remain at low levels in 2016, due to sluggish demand in Tier-3 and Tier-4 cities. Manufacturing investment is unlikely to rebound due to overcapacity in many sectors. 

Consequently, infrastructure is the principal means of stabilizing FAI growth in China. The government report emphasized its continued support for infrastructure investment. 

3.     Expect Continued Restructuring of State-Owned Enterprises

There is reason for optimism on the reform of state-owned enterprises ("SOEs"), which the Chinese government recognizes as increasingly unaffordable due to diminishing profits and rising debt. Pressure, incentives and subsidies from the government to restructure these so-called zombie enterprises will differentiate the healthy enterprises from the unhealthy ones, and ultimately lead to the survival of the fittest.

For a more detailed analysis, please refer to "Weekend Reads from China: What Investors Need to Know about the NPC Report".

CHINUS ASSET MANAGEMENT (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.  

© 2016, Chinus Asset Management LLC.

 

CHAM Presents at Alpha Hedge in Palm Beach

Chinus Asset Management CIO Charles Mautz presented at the Alpha Edge East Conference in Palm Beach, Florida last week, on a panel focused on "China after 2015." Here are some key highlights:

  • The Chinese government recently released its 13th Five-Year Plan.  Two key components are (i) reform of state-owned enterprises and (ii) enhancement of the role of the private sector.
  • China currently has 150,000 state-owned enterprises (“SOEs”) that control RMB 100 trillion in assets (US $15 trillion). SOEs earned an average return on assets of 2.4% in 2014. That return was negative if subsidies are excluded.
  • As the Chinese government opens up more of the economy to competition, we believe private companies will take market share very quickly and at much higher profitability.
  • In doing so, these private companies will create tremendous shareholder value, so it is an investment theme that we are following closely.

CHINUS ASSET MANAGEMENT (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.  

© 2016, Chinus Asset Management LLC.

CHAM Co-Founder Charles Mautz Joins “Business with China” Thought Leader Forum

Chinus Asset Management Co-Founder Charles Mautz recently participated in a “Business With China” Thought Leader Forum, in conjunction with Arnerich Massena, GeffenMesher, Miller Nash Graham & Dunn and the Portland Business Journal.  

Mr. Mautz made the following insights into Chinese markets: 

  • Trading volumes in China are heavily retail driven, comprised 80% of individual investors.
  • Chinese regulators have pulled back from direct intervention in the stock markets and markets are now finding their natural bottom.
  • Pension reforms in China could result in an influx of $7 trillion in institutional capital into the Shanghai and Shenzhen stock exchanges, doubling the existing market capitalization.
  • While industrial growth slows, the new economy of China – including its retail and services sectors – is growing at 12%.
  • Large inflows of institutional capital into the Chinese equity markets should reduce volatility and support higher valuations.

Mr. Mautz founded Chinus Asset Management in 2008, with co-founder Pete Nickerson, to provide investors exposure to emerging Asia, by utilizing an active investment strategy and regional managers across China, India, South Korea and Southeast Asia.

© 2016, Chinus Asset Management LLC.