China equities should see 15% EPS growth, says Galaxy

Jan 10, 2011

Hong Kong-based Galaxy’s portfolio of hedge funds had a good 2010 and its managers are optimistic that the global recovery will continue, with inflation the chief risk.

The hedge funds managed by Hong Kong-based alternatives manager Galaxy Asset Management, headed by Joe Chan, were broadly up in 2010. Their estimated full-year returns are as follows.

Galaxy China Opportunities Fund = -3.74%
Galaxy China Deep Value Fund = +21.94%
Galaxy China Special Situations Fund = +30.34%
Merchant Galaxy China Absolute Return UCITS Fund = +0.34%

Galaxy fund managers say they see positive economic signals for 2011. “In 2011, we believe the global economy will continue to recover, with a better than expected US economic outlook,” says Johnson Cheung, director of investment management and research at Galaxy.

“The combination of low interest rates, a weaker US dollar and renminbi appreciation should increase investors’ risk appetite towards China, whose economy is forecast to grow at 8%+, thanks to resilient domestic demand and government fiscal spending.

"China equities should see a 15% EPS growth this year – in this context, the valuation of the H-shares, which are trading at 11 times the 2011 price-to-earnings ratio, is not demanding; in fact, their valuation is slightly below the medium-term average.”

The Galaxy China Deep Value Fund achieved a 257% return in 2009, making it one of the world's best-performing hedge funds. The Merchant Galaxy China Absolute Return Ucits fund was launched on November 1, 2010, as a Ucits III version of its Galaxy China Opportunities Fund using Dublin-domiciled Ucits platform Merchant Capital.

The Galaxy China Special Situations Fund, which was launched in late 2009 has an event-driven strategy and mainly seeks to capture Pipe (private investments in public equity) opportunities in companies that are involved in mergers, asset injections and restructuring.

“The key to investing performance in 2011 will be more on making the right sector and stock picks than on broad market calls,” says Cheung. “While we see absolute upside to the markets over the next 12 months, there is less visibility on the markets’ trajectory.

"The main risk is inflation – which is turning out to more recalcitrant than expected – and China stocks are particularly sensitive to government policy headwinds. Nor can we completely dismiss other downside risks, such as a hard-landing of the economy, mounting geo-political tensions, or a flare up of the European sovereign debt crisis.”