Roman Osselan, Lagane Family Office
We believe China is a necessary exposure for any investor who wishes to construct a global portfolio. This is the case today even more than it was in the past.
Whether the country makes the headlines or not, China will still account for 20% of the world’s population and nearly 35% of global growth between 2017 and 2019. The Chinese authorities have learned the lessons of the uncertainty that weighed on 2015 and 2016, and the credit-control measures implemented since March are starting to pay off.
After a stabilising first half of the year, there has been a recovery in leading indicators since the beginning of the second half. This has resulted in a marked improvement in the country’s foreign trade, and a halt in the haemorrhage of capital outflows.
The only missing piece is inflation, which we believe will return, helped by the recovery of basic commodity prices, the stabilisation of energy and above all the easing of the dollar, which relieves the holding of foreign exchange reserves.
From a valuation standpoint, we note that Chinese equities are attractive: their profit price is between 11 and 13 times for listed companies, compared with 16 times for global equities. On top of that, these companies enjoy average profit growth of 20% a year.
Finally, we all know flows are a key driver. We believe that the opening of the continental exchanges at the end of 2014, combined with MSCI’s announcement in July of the integration of Chinese values in its emerging indices from next year, will bolster institutional managers over the next few years. This will dampen the previous volatility crisis.
Domestic investors are also returning: the number of accounts opened by individual investors is currently growing at a rate of 1% to 2% per month.
Our approach to China brings together the know-how of locally based fund managers who pass rigorous performance metrics and our own high-conviction stock picks.
Regular and transparent contact enables us to monitor the coherence of fund managers’ choices and gives us a feeling for the local companies they meet, beyond the headlines and our macroeconomic monitoring.
On conviction and on opportunity, we have historically completed these positions by the direct purchase of securities, which benefits from a liquid listing in American depositary receipts.
For example, we are investors in Baidu, in which we continue to see great potential.
The complementary nature of these two approaches allows us to provide diversification and a decisive input to better serve our clients.