M&G Investments’ Matthew Vaight has been upping his exposure to China, figuring that many stocks have fallen out of favour unfairly while investors obsess about macro concerns.
Mr Vaight, who has managed the M&G Asian fund since 2008, has been “steadily” increasing his Chinese holdings for some time and the country is now his highest overweight position relative to his index.
He said: “As investors have become concerned about China’s economic slowdown, China has fallen out of favour and share valuations have come down. Many Chinese firms are priced for a crisis, which we don’t believe will happen.”
Investors have become preoccupied with whether China will suffer a collapse in its growth rate or a gradual controlled slowdown – a ‘hard’ landing or a ‘soft’ one, in other words.
Mr Vaight said “concerns about the macroeconomic environment” meant that there were “promising companies that are being overlooked”.
He said he tended to avoid larger, state-owned companies in China because he wanted to “engage with company management, and this is not always possible in China”, especially when it comes to larger firms.
“Too many firms are still run for the benefit of the state, rather than minority investors,” he added.
“We remain wary of Chinese banks as we believe they do not understand, or are not allowed to practise, capital efficiency.”
Mr Vaight instead favours companies that have developed strong business models in China and are looking to expand internationally.
He said: “[An] area that we think has interesting potential is Chinese firms that are looking to export high-quality, sophisticated products and technology.
“The world has become familiar with low-cost manufactured goods from China but there has been an important shift lately as firms move up the value chain to develop quality products and build brand recognition.”
He added: “In our view, there are likely to be more world-class Chinese brands taking their place as ‘global leaders’ in future.”
As an example, he cited Greatview Aseptic Packaging, which manufactures “bacteria-resistant drinks cartons”.
The firm has built up a strong base in China but has “taken its proven business model and moved into new markets, setting up a plant in Germany to service the European market, with an eye on expanding into Latin America and the Middle East”.
Mr Vaight built up a position in Greatview last year, increasing his positioning in industrial firms, the biggest sector overweight compared with its index in the M&G Asian fund.
Other Chinese positions have been added following the indiscriminate selling off of whole groups of firms by investors.
Mr Vaight said he had invested in China Lesso, a plastic pipe manufacturer that had been hit by talk of a property bubble. The company had been sold down by investors as they exited companies exposed to the sector.
“However, when you actually look at the company’s exposure, the majority of its revenues come from government expenditure on infrastructure, which should be more resilient than the residential construction cycle,” he said.
