Martin Currie’s Catechis issues China warning

Changes in the political landscape in China have caused Martin Currie’s Kim Catechis to warn on potential economic turmoil in the region.

Mr Catechis, manager of the £17m Martin Currie Emerging Markets fund, said China is a “concern” and the fund is currently underweight Asia’s largest economy.

The manager said the current transition of leadership in China is “clearly the least smooth one” for at least 20 years.

He said that the level of indebtedness in the country was higher than investors realised because debt built up by small and medium enterprises had not been paid off, but rather continually rolled over.

“That is a worry,” the manager said.

Mr Catechis also expressed concern over the increased level of defence spending in China, which he said was more a political move than a necessity.

The manager said investors should “never use GDP as a rationale to invest” and said that while China’s GDP has continued to grow, the country has “failed to deliver” the level of returns that emerging market counterparts, such as Brazil, have achieved with much lower levels of economic growth.

Economic indicators in China have pointed toward a contraction, with the HSBC China Manufacturing Purchasing Managers’ Index (PMI) falling to 48.1 in June, its eight consecutive fall, compared with a final reading of 48.4 in May.

The fund has delivered a bottom-quartile loss of 5.7 per cent over five years to July 17 compared with an IMA Global Emerging Markets sector average return of 15.2 per cent, according to FE Analytics.

It is third-quartile over the three-year term with a return of 27.4 per cent compared with the sector average gain of 31.3 per cent, the data provider added.