Reforms in China are at a crossroads, as government intervention has done the country’s economy more harm than good so far, according to Henderson’s Charlie Awdry.
The Citywire A-rated manager made the comments at a roundtable event discussing the outlook for China in the wake of the market crash and currency devaluations.
'But this is against president Xi Jinping’s politics and the nature of China’s communist party,’ Awdry said.
Commenting on the stock market’s plunge in the past few weeks, Awdry said the sell-off can partly be attributed to a panicky direct state sponsored intervention in the A-share market in July.
‘This was followed by the yuan devaluation in August, which was initiated to allow it to have more flexibility and be included in the IMF special drawing rights basket of currencies, which led to further sell-off,’ he added.
New Chinese landscapes
The fallout from the market collapse scenario has created a new landscape for investors and business leaders alike, Awdry said.
On one hand, most business executives are too young to remember the last time the currency weakened in 1994 and so are unsure how to behave, he said.
Conversely, most investors on the Shanghai Composite index are retail and therefore more inclined to quickly take money out of the market in the presence of volatility.
However, Awdry said, since prices have fallen so much and estimated GDP growth has significantly slowed, good opportunities can be found in stock-specific stories and sectors such as consumer discretionary and IT.
‘Healthcare is also a great growth story because it’s one the government can’t control, people age and as they have more money to spend they take increasingly good care of themselves,’ he said.
Cyclical vs non-cyclical
Over half of Awdry’s portfolio is focused on non-cyclical sectors and names like tech giant Tencent, social network company YY and telecoms firm China Mobile are among his top holdings.
This is while more overtly cyclical sectors, such as property, banks, industrials and autos, account for 46% of the asset allocation at present.
Taking automobile sales numbers as an indicator of consumer demand, Awdry, who holds state-owned Chongqing Changan Automobile among his top 10 holdings, said car purchases have been delayed in past 12 months as people put money in the stock market.
‘Now these are being further delayed as those people lost money in the stock market,’ he said. ‘However SUV sales are growing 30-40% per year and autos sales are set to pick up again in the coming months.’
Media generated noise
Awdry said, while the massive movements of the Shanghai index has made great headlines, it is actually less relevant than the Hong Kong index for many international investors.
‘Many people are confused about where China fund managers put their clients’ money, and Shanghai is often less relevant to a lot of people than what the media resembles.’
‘We have money in both A-shares and B-shares, most of it is in Hong Kong-listed Chinese companies.’
Awdry has also been adding exposure to American depositary receipts (ADRs) as they are mostly in the service sector and have good cash flows.