Intervention fuels western investors' concern about China
As Asia begins to dominate the make-up of emerging markets funds, actions such as we have seen in China this week are of serious concern to portfolio managers and their clients.
Speaking to AsianInvestor from his firm’s offices near London’s Piccadilly Circus, James Syme, a senior portfolio manager with equities boutique JO Hambro, said its holdings of Chinese stocks were among the most contentious for investors in its emerging markets fund.
“There is enormous scepticism among western investors about China, a simultaneous state of thinking that China is about to collapse and to take over the world. We get a lot of push-back,” he said.
Syme listed the risk of Beijing reverting to a command-and-control model and away from its liberalisation drive as one of his three biggest fears for markets globally, alongside the rate of money creation in Japan, given its huge debt burden, and geopolitics in Asia.
He expressed his own belief that Beijing’s intervention was likely to delay its inclusion in the MSCI Emerging Market Index and brings its reform trajectory into question.
“Four weeks ago I would have said it [A-shares inclusion in MSCI’s EM benchmark] would have happened within 18 months, but this policy response shows a shift in emphasis to suggest it is further out than that,” he said.
“Reforms have clearly taken a back seat in the last four weeks. To have a specific index level target as a matter of national economic policy and to suspend [half of] the stocks in China are not reformist solutions. Getting A-shares into MSCI’s index is dependent on further reforms.”
He argued liberalisation of interest rates, the opening of China’s capital account and internationalisation of the RMB would be similarly set back.
The global emerging markets opportunities fund that Syme runs invests into China via H-shares and excludes A-shares. He said H-shares had been non-volatile performers, particularly large-cap state-owned enterprises.
He was unconcerned by the potential “Chin-ification” of Hong Kong – the risk of rising momentum-driven market volatility in the city due to closer integration of stock exchanges between the two sides.
“Part of being a trading city is accepting and even embracing that,” he said. “If the Hong Kong stock exchange starts to see huge volumes because mainlanders are investing in HK-listed entities, then great. I would like to think that is an opportunity."
JO Hambro global EM opportunities fund has $700 million in AUM, predominantly raised in the past 18 months out of the US. But it has attracted close to zero interest from Asia-based investors. It has returned 14.7% since inception in 2006, versus 11.1% for the MSCI Emerging Markets Index (net of dividends).
Syme pointed out its portfolio had become dominated by Asia. Of its 50 stocks, only two are from Latin America and a handful from Europe, Middle East and Africa. The vast majority are from India, China, Korea and Taiwan. “This is the most extreme positioning we have ever had,” he stated.
Asked why this had happened, he reasoned that quantitative easing and zero interest-rate policies in the developed world had driven an excess of investing in, and lending to, emerging markets that borrow, driving big booms in those markets, which he warned could not keep going.
“So we are very negative on Latin America, South Africa, Turkey and Southeast Asia. While India is its own case, China, Korea and Taiwan export non-commodities and they export to the US. That is where you want to be right now.”
Asked about the likely impact that a rate hike by the Federal Reserve and further US dollar strengthening could have on emerging markets, Syme said it would be challenging for Brazil, Indonesia, Turkey and potentially Malaysia.
While he said India could be negatively affected, he said the central bank had become good at managing it and that the country also had some decent exporters. “The combination of reforms and economic recovery in India could easily offset [any negative impact].”
JO Hambro manages GBP18.5 billion ($28.4 billion) from 22 investment strategies out of five offices globally. Its 10-strong team in Singapore runs the most, including an $11 billion global equity strategy.