Only time will tell if the liquidity injections made by the China Securities Regulatory Commission into the A-shares market will materialise into anything more than an artificial floor, according to Gary Greenberg, head of Emerging Markets at Hermes.
Greenberg, who manages the €509.4 million Hermes Global Emerging Markets fund, has opted to protect his fund against further market instability by cutting his A-shares weighting from 10-11% to 4-5% in the past two weeks.
Greenberg believes that government interference has stalled the market’s wind-down from unreasonable levels:
‘The retail enthusiasm for stocks got out of hand and pushed markets up far too quickly causing financing margins to become unsustainable.’
‘The market was overblown and the government pricked the bubble just in time. While their intervention did lead to a small bounce in the market, we had been hoping that the government would allow the market to correct more fully.’
Greenberg noted that unreasonable valuation is still deterring foreign investors from Chinese A-shares:
‘If we look at who’s been buying A-shares, it has mainly been Chinese retail rather than foreign investors, who largely remain underweight China and A-shares,’ he said.
‘With enough of a correction foreign investors would probably be more open to the idea of A-shares being included in the MSCI global indexes.
‘Settling volatility will be crucial for quelling the fears of global institutional investors, who will be the next source of demand for the Chinese market, contingent on the volatility coming down on both the upside and downside.’
Greenberg is looking to change his China positioning from strongly overweight to slightly overweight, while capitalizing on opportunities elsewhere in Asia.
New opportunities in Taiwan and India
Since the end of May, Greenberg has cut his China allocation from 12% overweight compared to MSCI Emerging Markets Index to 4% overweight, while upping his Taiwan and India exposure. He has gone from 0.5% to 2.6% overweight Taiwan, and 8% to 9% overweight India, over the same period.
Greenberg explained that Taiwan had been overlooked by many investors, ‘ASEAN countries are generally speaking, experiencing growing pains. We prefer Taiwan for its high pay-out, good dividend yield and reasonably good levels of governance.’
‘It is a highly investible place but a lot of investors have been underweight due to their belief that TSMC (Taiwan semiconductor giant) was priced too expensively over the last three years. Actually, the company has proven them wrong; the stock prices have moved up, while dividend yields remain market-leading leadership position.’
As companies move further into digitalisation and cloud-based technology, which he describes as ‘a major phenomenon’, Greenberg believes that investing in Taiwanese chip manufacturers such as TSMC, as well as Indian software, will enable investors to stay at the cutting edge.
China’s new economy stocks
Meanwhile, Greenberg is still finding value in some Chinese A-share stocks, in particular Chinese cloud-based and social network-based technology companies which he believes, represents the ‘new economy’ within the A-shares index, compared with ‘old economy’ H-shares.
‘The cloud-based and social network-based companies in China are examples of the new economy. Chinese consumers are swift adopters of internet and mobility and in many cases these companies are making substantial profits.’
He points to a recent fund addition, surveillance camera producer Hangzhou Hikvision, which has developed algorithms that enable cameras to conduct facial recognition analysis that can extend to reading emotions, which has significant security implications. He says ‘business is booming’ and its valuation has been more than reasonable.
When multiples come down to a reasonable level Greenberg is intending to find more opportunities in both ‘innovative’ companies like Hikvision and consumer-facing companies with strong brands, citing the solid performance of current holdings such as liquor brand Moutai and internet companies Tencent and Alibaba.