Newton’s Rob Marshall-Lee has dismissed Chinese currency volatility, suggesting opportunities have arisen from markets overestimating the extent to which the renminbi will fall.
This year’s torrid start for investment markets was triggered by falls in the renminbi, with its path prompting fears of a full-blown devaluation.
Some commentators suggested that investor sentiment would only improve once Chinese officials provided more clarity over their intentions for the currency, the exchange rate for which is still largely dictated by policymakers.
But Mr Marshall-Lee, head of emerging and Asian equity at Newton, said the currency is not as overvalued as markets indicate.
The manager, whose team runs the Global Emerging Markets, Asian Income and Emerging Income funds, said a devaluation of at least 20 per cent was being priced in to markets, whereas he expected a 5-10 per cent drop at most over the course of the next 18 months.
“This 5 or 10 per cent is less than factored in by the market, we think 20 or 30 per cent is factored in and that provides opportunities,” he said.
“We are seeing opportunities in high-quality companies with long-term growth. When we see 50 to 100 per cent upside on companies, taking 5 or 10 per cent for the currency on the chin is neither here nor there.”
He acknowledged the currency’s value had increased a long way in recent years in trade-weighted terms, but said this was counteracted by China’s products moving up the value chain, thus becoming more expensive. “If you adjust for that, it’s a 20 per cent appreciation rather than a 40 per cent appreciation. China is [also] increasing its market share globally, which does not point to an overvalued currency or an economy that should be rapidly depreciating its currency.”
Part of the renminbi’s strength was due to quantitative easing programmes in Japan and the eurozone that are expected to continue for the foreseeable future, the manager added.
He said China’s $3.3trn (£2.3trn) in currency reserves, a figure that has fallen from $4trn in recent months as it sought to defend its currency, remain sufficient to prevent sharp falls in future.
About 20 per cent of Mr Marshall-Lee’s GEM fund, which has returned 8.5 per cent since he took over in September 2013 compared with a 7.9 per cent loss for the IA GEM sector, is exposed to China.
When Hong Kong exposure is added, almost one-third of the fund is focused on the region. The fund also has a 50 per cent exposure to consumer stocks, with Chinese education and e-commerce stocks a key play.
Meanwhile, the team-managed Asian Income fund, formerly run by Jason Pidcock, has 14 per cent in Hong Kong stocks.
In keeping with his view that opportunities are emerging, Mr Marshall-Lee said he is keeping one eye on the Chinese state-owned enterprises, and has a small holding in PetroChina.
He said there are signs of government retrenchment in such sectors, as well as the removal of excess and unprofitable capacity in the cement and steel space.
OPTIMISTIC ABOUT CHINA
50%
Allocation to consumer stocks in Newton GEM fund
10%
Maximum fall in the renminbi predicted by Rob Marshall-Lee
