Asset managers normally look at Asia as a smorgasbord, with a variety of markets to suit every taste, from safe to adventurist, and a wide range of return potential. But lately, all everyone seems to care about is China.
A dramatic plunge in Chinese stocks and a rare depreciation of its currency have sent the region’s fund managers scrambling. Some see the recent setback as a welcome correction that provides a buying opportunity, while others are standing back until the dust settles. Local players in the region’s smaller markets are anxious to see how China’s slowdown will affect their economies and securities markets.
Eastspring Investments, the Asian asset management arm of U.K. insurer Prudential, is adopting the long view. “We are taking the opportunity of the recent market volatility in China to look for attractive names which might have previously been too expensive,” says Ken Wong, portfolio manager at the Singapore-based firm, which manages $134 billion in assets. He says the firm has found some Chinese shares “trading substantially below intrinsic value.”
Value Partners Group, the Hong Kong–based alternatives and long-only manager, has plenty of reason to feel gun-shy. Its $2.17 billion Classic Fund lost 20 percent of its net asset value in the six weeks ended July 8. But the firm, with $16.5 billion in total assets, sees the slump as a healthy adjustment and remains committed to the mainland market. Value Partners plans to seek a bigger investment quota from Chinese regulators and expects that Beijing will continue with financial reforms that open the door wider to foreign institutions, says chair and co-CIO Cheah Cheng Hye.
“My own guess is we are seeing a big correction that is in context of a multiyear bull market,” says Cheah. “This multiyear bull market is not sustainable without occasional shakeouts and corrections.”
Other firms are more cautious. Lion Global Investors, the asset management arm of Singapore’s Oversea-Chinese Banking Corp., deferred the launch of two new renminbi-denominated funds in April even though Chinese regulators had just given the firm a 1 billion yuan ($156 million) quota to invest in mainland shares in the local currency. “We were concerned with the amount of margin financing in the system,” says Frank Lim, a product specialist with Lion Global. “We may launch the funds once we sense that confidence is returning to the market and valuation becomes sufficiently attractive.” A 10 percent rebound on August 27 and 28, which lifted the Shanghai Composite Index to 3,232, provided some hope that the market might be bottoming.
On August 11 the People’s Bank of China caught fund managers off guard by changing its method of setting the daily renminbi fixing to give a greater role to market forces. The currency fell a little more than 3 percent against the U.S. dollar over three days, the first such devaluation in more than two decades. Authorities said the move was part of China’s shift toward letting markets, rather than the Communist government, steer the $10 trillion-plus economy. Depreciation also happens to help China-based exporters, whose share prices may get a lift in global stock markets as well as China’s own.
Investors can expect a further depreciation of between 2 and 7 percent over the next three to six months, says John Vail, chief global strategist with Tokyo-based Nikko Asset Management. “You have to make sure you invest in stocks that make the most of that depreciation,” he says.
Nikko is more bullish on its home market. The yen hit a 13-year low against the dollar in May, thanks to the government’s stimulative fiscal and monetary policies known as Abenomics, after Prime Minister Shinzo Abe. Nikko’s Japan Dividend Equity Fund, Hedged Class, gained more than 10 percent last year, and the firm maintains an overweight stance toward Japanese stocks. “I would suggest over the intermediate term you can do well with plain vanilla or small and mid-cap,” says Vail. “We’re definitely boosting our marketing efforts for Japanese equities.”
India has largely resisted the turmoil emanating from China, reflecting positive sentiment about the reform agenda of Prime Minister Narendra Modi and excitement over projections showing that the country will grow faster than China this year, at a rate of 7.5 percent. “There’s a lot of optimism because of the initiatives being taken by the Indian government,” says Sunil Singhania, CIO for equities at Reliance Capital Asset Management. “The situation on the macroeconomic front is very positive.”
The Mumbai-based firm is actively targeting foreign investors to enter the Indian market. Reliance Capital has attracted a combined $800 million over the past nine months into two new funds — a bond and an equity fund — targeting Japanese investors. Singhania says the firm, which manages more than $25 billion in assets, plans to launch two more funds in Europe by early October, starting at the equivalent of $157 million per fund and growing ten times over four years.
Elsewhere, Vietnam devalued its currency in August to match China’s depreciation and maintain local exporters’ competitiveness with Chinese peers. The currency move, combined with the bearish sentiment coming out of China, pushed Ho Chi Minh shares down about 16 percent at one point last month, though a late rebound trimmed the August losses to about 8 percent. But offshore institutions are expected to jump at 22 Ho Chi Minh City–listed companies now at their 49 percent foreign ownership limit when the government produces specific rules to back up its July decree allowing ceilings to reach 100 percent.
Dragon Capital, a Ho Chi Minh City management firm with 90 percent of its $1.15 billion in assets in Vietnamese equities, is buying cheap on a forecast for later gains. “Vietnam is very stable, but China is an exogenous shock that it can’t do anything about,” says Dragon Capital’s chief investment officer, Bill Stoops. “We are using the opportunity to buy on weakness.”
