Despite the recent bloodbath in Chinese stocks – Shanghai’s benchmark CSI 300 index fell almost 7% in a week in late June and is down 12% year-to-date – Goldman Sachs Asset Management remains optimistic about the mainland market.
The consensus is that the sharp fall was largely down to China’s central bank raising interest rates in an effort to curb lending. The People’s Bank of China raised the Shanghai interbank offered rate (Shibor), the rate at which banks offer loans and China’s equivalent to Libor, to 11% last Monday, as it feels the domestic loan market is growing too fast.
Investors responded to the tightening liquidity measures by yanking cash out of equities. In an effort to calm markets, the PBoC said last week that it had been providing some liquidity support to financial institutions, and would make similar moves in future to support banks.
Still, many believe these statements by the PBoC to calm the credit crunch does not necessarily mean they will inject liquidity on a large scale, and some argue a few bankruptcies may emerge as a result, particularly among small and medium-sized banks.
Katie Koch, head of the global portfolio solutions group for Europe, the Middle East and Africa (Emea) and Asia ex-Japan, says small-scale bankruptcies are possible should rates stay high, but is confident China’s central bank will inject more liquidity into the markets.
“The cost of financing is so onerous if rates remain high, but we think it’s unlikely [that they will],” adds London-based Koch. Promoted earlier this year from senior portfolio strategist, she was speaking to AsianInvestor during a trip to Hong Kong last week.
Rates have indeed come down, with Shibor hitting 5.2% yesterday, although she says GSAM has been underweight small financial firms in China for some time.
However, the fund house does not believe a repeat of the 2008 crisis is in the cards, partly because China’s central bank has a healthy sovereign balance sheet.
It’s easy to get caught up in the see-saw nature of today’s markets, notes Koch, pointing to one of GSAM’s private banking clients, who a few weeks ago cited concerns about a liquidity bubble forming in China, then shortly afterwards requested a call to discuss liquidity drying up.
“In a very short period, investors have gone from being very concerned about a liquidity bubble in China to being frightened of liquidity tightness,” Koch says. “And, like most things, the answer is somewhere in the middle.”
GSAM is generally positive on mainland stocks. “In Asia, we really do like China. You have to be selective and thoughtful and weigh A- versus H-shares, but A-shares are cheaper than in 2008,” Koch says.
Of course, selectivity is key, she adds, noting that GSAM is avoiding sectors that are affected by interest rates, including financials (small firms in particular), energy companies and some consumer-driven stocks.
And the current buying opportunity extends across emerging-market growth stocks, which are trading at a significant discount to those in developed markets, says Koch. By GSAM’s cyclically adjusted price-to-earnings ratios, Russia, for example, is trading at a 50% discount to the US.
“I’m not saying Russia is [without risks], but at a 50% discount, the risks are priced in,” she says. “And often it’s counterintuitive to buy high-quality assets, as they can be risky if valuations are stretched.
“We do believe there are buying opportunities [now], but there will also be a period of extended volatility that will last at least the duration of the summer.”
As such, GSAM’s multi-asset solutions division, which oversees $28 billion in AUM globally, is advising its clients, both institutions and individuals, to build exposure in growth and emerging markets across asset classes in the next few weeks.
Still, too many pension schemes – particularly in the US and the UK – are massively underweight emerging markets, she argues. Koch says she cannot see how investors will “achieve their goals by only investing in developed markets”.
Of course, it's important not to be blind to issues on the mainland, she says – which include challenges as the country evolves from being export-driven to consumer-focused. But making selective investments in companies in certain sectors would be wise now, Koch says, highlighting digitalisation companies and some environmental firms.
On the environmental shift that’s occurring in the mainland, she notes that while “China does have to be dependent on coal for some time, the government has made it clear that it is committed to sustainable growth in the future, and they’re more invested in the alternative energy space [than the US]”.
Mainland policy makers appreciate that “having a higher quality of growth is more important that double digit growth” and, as such, regulators and government officials have been more proactive of late in addressing smog and pollution issues.