Invesco sees bright spots amid China slowdown
Despite the recent bloodbath on Chinese equity – both Shanghai’s benchmark CSI300 and Hong Kong’s Hang Seng Index are down around 8% year-to-date – consumer confidence in certain sectors has remained reasonably robust on the mainland, according to US fund house Invesco.
Paul Chan, Invesco’s chief investment officer for Asia ex Japan, argues there are a number of stock-market gems to be found, with automotive industries, internet companies, tourism and the gaming sector performing well.
“We haven’t seen a collapse in consumer confidence yet, as can be seen from Macau gaming data,” Chan says. “It’s a simple view: casinos and gaming are recession proof, and in my view they are a cheaper way of getting consumer discretionary [exposure] as opposed to alcohol and beverages, which are very expensive.”
Downturn-resilient segements such as alcohol and beverage stocks are trading at 25x P/E, while casino stocks are in the low teens, Chan notes, adding that gaming stocks have good cash flow and pay dividends in some cases.
While he acknowledges the structural slowdown in China's economy, he is not convinced that the country will become the consumer-driven powerhouse that others forecast.
Recent reports by Julius Baer suggest that wealthy Chinese consumers are using their spending power more than ever. Still, Chan notes that Chinese families are not spenders, but savers, and as such does not believe the nation will ever become as consumer-driven as the US.
“They [Asians] have a high savings rate, and savings is still very much a part of the culture," he says. "I don’t think you’ll ever see Chinese families with four or five cars in their garage.”
Mainlanders put wealth in property, which has led to a bubble – Chan says a small apartment in Beijing costs Rmb3 million ($489,000) compared with a large apartment in Seattle for $500,000. He suggests Asian investors should view this as an arbitrage opportunity.
Although the Chinese central bank is attempting to prick the bubble by tightening liquidity - a few weeks ago, interest rates spiked to a record 13% with the People's Bank of China making no effort to pump liquidity back into the markets as it attempts to curb risky lending - Chan is not convinced it can be done. “I haven’t yet seen a bubble deflate in a smooth fashion,” he says.
He reflects that Chinese fundamentals are sound and that it has only had two to three years of credit growth. A further 5-10 years of similar growth and he says he will be worried.
The PBoC is doing will likely keep monetary policies tight, warning banks that they must manage risks that have resulted from rapid credit growth. As a result, financials, including banks, insurance companies and the property sector, will feel the squeeze near-term, Chan says, adding that deleveraging will “hit properties hard as they rely on bank financing”.
He anticipates consolidation in the banking sector, noting Invesco is underweight financials. The firm, which manages $729.3 billion globally as of March 31, has $7 billion invested into China, where he concedes that valuations are "tricky".
Chan notes that after Shibor rates hit to 13%, equity markets went into a tailspin and all but extinguished what had been a reasonably bullish outlook on the mainland from the first half of the year.
As such, he’s seen an increase in the number of Asian investors seeking to put their money to work elsewhere. US investors have also been reallocating out of Asia, although whether the trend continues remains to be seen, he says.
While much has been said about China’s government pushing towards cleaner forms of energy, Chan is dubious. “It’s all hype,” he says. “Renewable stocks have done well. But I don’t think renewable energy is going to drive the economic growth in China. How do you replace 11 million barrels [of oil] a day?”
Natural gas is a hot topic in the US – shale gas now accounts for 30% of US gas consumption, compared with 1% in 2000. While there are untapped reserves in China, Chan notes the US has a flat landscape in comparison with mountainous China.
"Extracting gas [from mountains] is very expensive. I just don’t think solar and wind can power China,” he says.
Meanwhile, on the hiring front Invesco is progressing. After adding Abdul Jalil Rasheed as investment director and head of its Singapore office earlier this year, it is set to transfer a Hong Kong-based analyst to the Lion City and hire a second analyst in the third quarter.