While doubts continue to gather around the sustainability of China’s growth, an area which is drawing increasing investor interest is its so-called ‘new economy’.
This area, which includes gaming, internet, environmental and health care stocks, is set to outshine the country’s ‘old economy’ sectors such as industrials, banks and utilities, which all tend to be associated with government investment.
Nevertheless, opinions around the investment potential of these emerging businesses appear to be divided along regional lines. China-focused equity managers tend to believe the new economy is the place to be for the year ahead, while those investors with a broader Asia Pacific view, have reservations as a result of potential state intervention.
Out with the old?
The Chinese government’s reform package announced at the end of last year has reassured many investors on the outlook for the market. It will take years for these measures to take effect but they have provided a solid indication over the path China is taking and this clarity is likely to benefit these developing sectors.
Citywire A-rated Bin Shi (left) of UBS, who runs the $750 million UBS (Lux) Greater China fund, said that over the past 12 months he has been focusing on new economy names in the health care, internet and consumer sectors and the market is only just catching up with this trend.
‘I still like the new economy, these sectors have a way to go.
‘We’ve gone beyond the discovery stage in these areas and have now reached the continued growth stage. The valuation re-ratings are now done,’ he said.
Fellow Chinese equity and Citywire A-rated manager Lilian Co of Hong Kong-based group LBN Advisers has also been positioning her Strategic China Panda fund, which she runs on mandate on behalf of E.I. Sturdza Investment Funds, towards new economy names on the basis they will benefit from the country’s multi-year reform plans.
However, while these stocks present good opportunities, traditional sectors should not be discounted, she said.
‘The old economy sectors are under de-rating pressure but eventually they will be at a price where we want to own them again. Being cheap is not a reason to buy a stock but eventually we will see a reversion to mean.
‘When valuation gaps between the old and new names become too wide or when the old economy names reinvent themselves, that could make traditional stocks this year’s next wild trade,’ she said.
Worries over state intervention
A number of fund managers with a wider Asian investment remit are more wary of the new economy in China. First State’s head of Asia Pacific ex Japan equities, Angus Tulloch, for example, acknowledges such stocks will get an uplift from China’s growing consumer culture, but has concerns that the government may restrict their growth.
Themes such as the internet and casinos, he thinks, have attracted too much investor attention and are also prone to government red tape. Cash flows, Tulloch argues, are generally very unpredictable in this area and licences to operate very dependent on government regulation, something he thinks has not been factored into valuations.
Tulloch, who runs the $10 billion First State Asia Pacific Leaders fund, says: ‘We don’t like sectors where regulation can suddenly change, and something that is worth $20 billion is valued at $10 billion the next day, that’s not the sort of investment we like,’ he said.
Aberdeen Asset Management Asia director Hugh Young (left) is also treading carefully around this area. ‘We’ve found it very hard to identify quality companies in China. We’re finding better Indonesian companies that we are more comfortable with,’ he said.
The policy around stock ownership in China is unclear and while some companies in the country have done well recently, Young said he has never been tempted to add them for short-term boosts to his performance.
He currently has very little allocation to the country, but has some indirect exposure through Hong Kong to China’s tech sector.
This article originally appeared in the April issue of Citywire Global magazine