Asia ex-Japan – and China in particular – represent the best investment opportunities, despite investors exiting the mainland, according to Arnab Sen of Harbour Capital Management.
He also has a contrarian view to some of his fellow hedge fund managers who have been flocking to the Japanese market in search of returns.
“Japan is a bug in search of a windshield,” says Sen, referencing economist John Maudlin. Sen serves as chief investment officer for Hong Kong-based Harbour, which runs an Asia ex-Japan long/short equity fund. “I don’t know what the risks and the rewards are.”
Sen, speaking last week at the Karen Leung Memorial Investor Conference in Hong Kong, views Japan as a market with short-term opportunities. However, he is cautious about the longer-term effects of the government’s unprecedented monetary easing.
The rest of Asia is not immune to what he foresees as a correction in the global market, when interest rates eventually rebound from near-zero levels.
“There’s going to have to be a global reset, with the amount of debt there is in the world,” says Sen. “We all, probably in our hearts, think there's going to be a 'big bang' moment out there.
Referencing economist Charles Gave, Sen adds: “You need to be invested in the parts of the market that are the least manipulated right now,” referring to government monetary policy. “You can better assess the risks that you’re taking and the rewards that you’re getting. Your investments might go down 50% but [will] survive.”
Indonesia and the Philippines have risks, but they can be assessed, as they can in China, which Sen refers to as having great opportunities. “You make money in China by basically investing along with the government.”
The sectors that China is focused on include healthcare, smart phones, clean energy and gaming.
“As a fund manager, there are opportunities to be long on the good companies that are going to do well, but this time around there are also opportunities to be short bad companies that [the government isn't] going to support anymore,” says Sen.
His sentiments run counter to those of hedge fund managers in the US, who view Japan as an exciting market for stock-pickers, while emerging markets – including China – are comparatively less compelling.
Carson Block, founding partner of Muddy Waters Research, is particularly nihilistic, believing that “China is a massive investment bomb”.
However, Shanghai-based alternatives fund manager Earl Yen of CSV Capital believes that due to lukewarm investor interest, Chinese equities are trading at a big discount and represent good value.
Says Sen: “Why are people not investing in China? It’s because they worry about the risks in China.”
While he acknowledges that “it’s ultra-important right now to assess the risks and the rewards that you’re taking”, he believes “there are much better risks in the least manipulated markets than there are in the most manipulated”.
China falls in the former category, according to Sen, and his investment thesis for the market is thus: “Long good companies, short bad companies and sleep well at night.”