China shares offer attractive risk/return opportunities

Jing Ning, a senior portfolio manager for Chinese equities at BlackRock, says the sell-off in China-related shares has created attractive buying opportunities for long-term investors.
BlackRock has launched its first China fund, which is co-managed by Jing Ning and Alan Wang. The BlackRock China Fund will invest in companies that are benefiting from the mainlandÆs increased consumer spending, strong infrastructure investments and export growth. Ning, who joined BlackRock from AIG Investments in January, shares with AsianInvestor her outlook for ChinaÆs equities market.

What is the investment mandate of the BlackRock Global Funds China Fund?

Ning: The fund invests at least 70% of its total assets in the equity securities of companies domiciled in, or exercising the predominant part of their economy activity in, China. It also has the flexibility to invest in a wider universe that includes companies benefiting from growth in China listed in Hong Kong, China, Singapore, the US, Taiwan and Australia, etcetera. This ensures the fund will have plenty of alternatives when H-shares appear overpriced.

Is there any particular reason that BlackRock's first single market fund to be manufactured in Asia focuses on China?

We are very positive on ChinaÆs economy. This launch comes at an exciting time as China reaches a turning point in its economic cycle. It is moving from a low-margin, labour and energy-intensive exporting economy, to becoming a domestically-fuelled economy driven by its transition to a consumer society.

Why are you launching this fund now, given the volatility exhibited by Chinese shares over the past months?

China has a more sustainable growth story, supported by profitable exports, increased consumption, strong infrastructure investment and capital markets development. The market downturn has created attractive risk/return opportunities. China has a high predictability of corporate earnings for 2008 aided by a currency tailwind and falling corporate tax rates.

At least 70% of the fund's assets will be invested in Hong Kong-listed red-chips and Hûshares. What is your assessment of valuations of red-chips and H-shares?

The economy is in a cyclical trough, which has been reflected in valuations.

What can your fund offer investors that is unique compared with other similar funds that invest in red-chips and H-shares?

There are four factors that differentiate BlackRock China Fund with other funds: its unique flexible investment style with a value-orientation; our broad investment universe goes beyond China; independent risk management; and combination of quantitative and fundamental analysis.

The fund deploys a flexible approach with a value orientation, an approach which we believe is particularly appropriate when investing in Chinese securities for the long-term. Historic data proved that value stocks in China have produced superior capital than growth stocks. The MSCI Value China Index outperformed the MSCI Growth China Index by 233% between 1997 and 2008.

The investment team conducts fundamental research to identify strong ideas once the initial universe of over 2,000 stocks has been filtered using a proprietary quantitative screening process.

What are the main opportunities that you are seeing in China. How are you going to position the portfolio to take advantage of those opportunities?

China is benefiting from rising infrastructure investment that is boosting efficiency, as well as increasing levels of consumption. Looking ahead, we expect that domestic investment and consumption growth will offset slower exports as China transitions to a more domestic-driven economy, improving social security and increasing penetration of consumer credit are all supporting the domestic consumption trend.

Are there any particular sectors that you are heavily biased towards?

The consumption sector because China is transitioning to a consumer society. The industrial sector with high-end export service can enjoy the cost advantage. The coal industry, which is a long term-story, because the coal shortage problem in China is not easy to solve. The commodity sector because of its very attractive valuation of six to seven times price-to-earnings ratio and our expectation of a 20%-30% earnings growth.

What are you avoiding?

Low-end exporters, insurance, highly leveraged developers.

What are the main challenges of investing in China at the moment?

ChinaÆs equity markets have typically been volatile, governed by emotions. We believe that our disciplined, valuation-driven approach to investing will lead to attractive capital growth in the fund.

What are the main risks and how are you managing those risks?

Corporate and financial disclosure need to be improved. There are also regulatory and policy risks. We conduct company visits to meet the management face-to-face to understand more about a companyÆs background. Our local contact is informed on potential changes in policies. We use a proprietary model to analyse the financial strength of listed companies.

How are you going to deal with the risks involving inflation and the local currency?

We anticipate ChinaÆs headline inflation to moderate in the second half of 2008. We overweight companies which have strong pricing power and dominant market share. We are positive on the currency outlook of the renminbi and therefore will leave the currency unhedged.
¬ Haymarket Media Limited. All rights reserved.