Merely 'good' deals are not good enough for Galaxy

Joe Chan is the managing director of Hong Kong-based Galaxy Asset Management, a hedge fund that runs three funds, the Galaxy China Special Situations Fund, the Galaxy China Opportunities Fund and the Galaxy China Deep Value Fund. The latter pulled off a 257% return in 2009, making it one of the world's best-performing hedge funds.

Is China overheating?
The overall economy in China is not all that overheated. The country has been growing at this level of 8%-plus growth for some years. What might be different this time round is the fact that the government spending packages are responsible for much of the growth. That has created some overheated sectors, such as the property and infrastructure sectors. This is why the government is now reining back some of the stimulus packages.

But one important thing to bear in mind is that Beijing wants sustainable and balanced growth, not to kill growth entirely, so the general outlook for the economy is still positive, albeit with greater uncertainties.

Is it hard to find undervalued and special situations in China because of the easy availability of credit?
Compared to 2008, it is less easy to find very attractive deals, but because of the amount of capital-markets activity, it is also true to say that the number of opportunities has increased. Since the last quarter of 2009, it's obvious that liquidity has started to drop because of the strategy being adopted by authorities.

Can you elaborate on what you mean by 'drop'?
It's already growing at a slower pace and in January and February there's some curb on lending because they have lent too much. If you ask a businessman in China today, he'll tell you it is much harder to borrow money than it was a year ago. It's not because of interest rates, but because of availability. If you have a project requiring finance, it will take a lot longer in lead-in time to get bank approval now.

How do you, as a fund manager, adjust net exposure to take account of the outlook?
Our net exposure is in the 20s at the moment and we are just focusing on alpha generation rather than playing the general market. Also, the global market is going through a period of uncertainty. To find that alpha, you just have to dig through the pile of companies and be more selective in finding the jewels. 

Now just a 'good' deal isn't enough; it has to be a great deal or we don't want to be near it. This year the IPOs that came to market are under water. That suggests to me that things are not the same, and people don't have the money for them. If it doesn't perform, they dump it and find the next, and so on.

What sectors do you think will outperform and underperform in China?
Last year we were positive about [consumer-related stocks], but latterly they underperformed, as their valuations became too high. For this year, I like environmental protection and alternative energy, as these are being supported by government policy, another interesting sector is agricultural and pharmaceutical/medical sectors.

The property sector may be under pressure because of policy, but who knows? In three months, there could be another change. I think infrastructure and basic materials may slow down their top line, and their valuation has already factored in a high growth rate to their top line for the next couple of years.

Are you excited about stock-index futures? Or are there more important things going on?
The macro picture is more important. Whether we have futures or stock borrowing doesn't affect market direction that much, though they do add colour, giving us those additional instruments to play with. Before all the details are known it will be hard to know the effect, but at this point I don't think the impact will be great.