A recent article by Perpetual global equities portfolio manager, Garry Laurence, argued that the Chinese economy is still growing and providing value.
“Despite all the fearmongering about China over the past three to four years, regarding excess property development and debt, the Chinese economy has continued to be one of the fastest-growing economies globally,” Mr Laurence said.
“We have held 5-10 per cent of our portfolio in high-quality Chinese companies with strong balance sheets.
“Just because a stock goes up or down in the short term, does not mean that your investment thesis is right or wrong.
“What is more relevant is whether the company continues to grow its earnings and allocates its capital effectively, because if it does, the market will eventually price the security efficiently,” Mr Laurence said.
Mr Laurence gave the example of insurance companies Ping An and China Life, which Perpetual held despite growing pessimism.
From 2011 to 2014, both companies doubled their earnings.
However, despite long-term growth potential, the stocks were trading on price to earnings ratios of 10-12 x earnings, Mr Laurence said.
The reason, according to Mr Laurence, was that money was not flowing into equities listed on the Chinese or Hong Kong stock exchanges, but rather flowing into Chinese property, US equities and bonds.
“All this changed six months ago, when the Chinese government decided to open up the Chinese A share market to enable more foreign investors and Chinese retail investors decided that they should stop buying as much property in China, which started to see falling prices, and instead to start investing some of their savings into the equity market.”
“In the space of six months, these life insurers made up all the gains that they should have realised over four years and have more than doubled.
“Over the past year the Shenzen Composite index is up 98 per cent, compared to the US S&P 500 up 13 per cent and Australia’s all ordinaries up only 9.3 per cent.
“China is still growing GDP at around seven per cent, however you have to pick your stocks and the sectors you want to be exposed to,” he said.
Mr Laurence pointed out that there is a merit to patience.
