China: Investor Fears Subside as Economy Grows

Charlie Awdry, manager of Janus Henderson China Opportunities has seen investor euphoria and hatred in his decade of running funds - but what can investors expect next?

Emma Wall 6 July, 2017 | 8:00AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Charlie Awdry, Manager of the Janus Henderson China Opportunities Fund.

Hello, Charlie.

Charlie Awdry: Hi, Emma.

Wall: So, China seems to be doing pretty well so far this year and indeed sentiment around the region has improved among investors because not that long ago it was a kind of avoid, beware region, wasn't it? So, have the fears gone away for a reason or is it just about managing them?

Awdry: I think the fears are still there. Obviously, China grabs a lot of headlines and with things like a large amount of debt and slower growth, then it's quite easy to get a scare response. But I think to that extent actually some of the fears have gone away because growth has been more rapid than people thought. What we are trying to say to people is that we know that growth is going to be slower now than it has in the past and unfortunately, the debt situation is not going away, but please have a look underneath and see what's happening in the economy below those headline figures and you might see some good signs.

Wall: We're constantly told in developed markets that economics and stock markets are uncorrelated, partly because if you have a look at something like the FTSE 100, 70% of revenues come from overseas. That's less so the case in emerging markets, isn't it? But I believe there are some companies in China where actually what goes on with the economy not necessarily has an impact on revenue and on stock prices?

Awdry: Yes, absolutely. One of the things that we would do to show to clients is show the general trend of economic activity, maybe a PMI survey of manufacturing activity which goes up and down and at the same time show them the net profit of an internet company or a Macau casino company or a car company.

And you can see that basically because consumers have rising incomes and choose to spend it, these companies have quite good outlooks or have delivered quite good profits in the past. So, yeah, absolutely. There's a lot of companies that really don't mind what the PMI is or whether GDP is 6 or 7 or whether there's a lot of debt.

Wall: But investor sentiment does of course move markets. It is looking more positive now. What do you think is the inflection for that? Why are people considering China again?

Awdry: Yeah, a good point. I mean, I've run this fund for 11 years and in that time, I've seen investor euphoria which was exhilarating at that time, looking back quite scary. Then I've seen total disbelief and hatred towards the asset class. And I'd tell you what we're in now is a kind of not sure, almost forgotten about and of course, that's quite a good starting point for investment. And I think people are suddenly now saying, well, oh, okay, so you can generate some returns in china, that's interesting, how are you doing it – and relate it back to your questions about slower growth.

But what I think would be really interesting for us as an asset class is if China continues to outperform and goes up when developed markets fall. Because up until now it's been very easy for a lot of clients to say, Charlie, thank you; that's very interesting, but I like my Facebook shares or I like my Amazon shares or whatever. Now, if those shares happen to fall and China outperforms, then that's much more difficult answer. And in fact, we all know generally that flow follows performance. So, if we outperform on a relative basis then I think that could be very interesting.

Wall: Now, over the last month there have been two things that have happened within the sort of investment world that have affected China. One of them is, China A inclusion in MSCI. So, ETF investors are being forced to buy more China shares. And the other one that was news this week that there is going to be a Bond Connect between the China market and other international markets. Both of those I suppose bring China assets, equities and bonds, to the individual investor in a more accessible way which I presume is a positive thing for investors.

Awdry: It's a positive thing for investors, if they wanted to embrace China. I know many people having talked to a lot of clients, who don't, and that's absolutely fine and they may have some issues. But certainly, I would see it as with more foreign money coming in there will be an accelerated interaction between foreign investors and Chinese companies.

And I think the more that happens, the more the corporate governance can be taken forward and improved from a low base and therefore, I think, that improves the outlook for those investors. But it's going to be very small. I think by August next year 2018, it will be 0.73% of MSCI Emerging Markets. It's very small.

Active managers like ourselves, we already have more than 10% of our funds in a very, very small subset of that and I think that's the exciting aspect for active managers that people who have ignored China previously, this might be their catalyst to go there to the Mainland markets and they might be surprised to see some of the quality companies there, not all of them, but a very small subset are very good companies.

Wall: Charlie, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar