First State’s Lau detects benefits to slowdown

The manager, who works on several First State funds, including the £398m Greater China Growth and £49m Asia Focus offerings, said he was not hiding away from macroeconomic “negatives” such as weak growth and the spectre of a Chinese slowdown.

“The first negative will be on economic growth – the world’s not in very good shape. There is also too much leverage in the system,” he said.

The second challenge is there’s too much liquidity, and value doesn’t come cheap – if there is anything decent the valuation is expensive.

“We are cautious on Chinese economic growth,” added the manager, whose China fund has reopened to new investment after being soft-closed for the past four years.

Mr Lau suggested stockpicking opportunities could arise amid these difficult conditions, with hardship spurring on company innovation.

“There was a period when property prices went up 20 per cent a year in China and you didn’t need to do anything. [In those conditions] it doesn’t make sense to innovate,” he said.

“The fact that economic growth is sub-par could be a blessing in disguise. When the economy’s bad it encourages innovation.

“The macro is pretty horrible and challenging. From a bottom-up perspective we are trying our best to find interesting companies that are doing something different.”

He noted: “There’s no question about whether the slowdown is structural. If you are already the second-largest economy in the world, you can’t grow more than 7 per cent.

“The population is getting old. There’s too much debt in the system, and the government is keen to fight corruption. That’s good for the longer term but bad for economic growth [in the short term].”

This caution is reflected in the manager’s asset allocation decisions.

As at the end of March, Mr Lau had allocated just 8.8 per cent to China A-shares in his Greater China Growth fund, which he co-manages with Sophia Li and which invests in China, Hong Kong and Taiwan.

China-listed stocks that the manager has owned in recent months include Shanghai International Airport and appliances manufacturer Gree Electric.

Mr Lau noted that despite his bearishness on China, there were also other reasons for optimism in the long term.

“There are 7m university graduates from China a year,” he said. “A number of these will be quite capable and able to do something different.”

He added the investable universe in Asia had opened up for investors in the past 25 years.

“As bottom-up investors we have more choice,” he said.

“Twenty-five years ago Asia was a closed market and you had a few companies to choose from. The first batch of A-shares companies [emerged] in 1992. If you go into A-shares today there are more than 3,000 companies in which you can invest.

Mr Lau also warned investors not to get complacent about returns at a time when many economies were implementing negative interest rates.

“Some people argue that things are okay because interest rates are zero and anything better than zero isn’t bad. That view is very dangerous,” he said.

The Greater China Growth vehicle has strongly outperformed its peer group, the Investment Association China/Greater China sector, over five years, delivering 33.9 per cent compared with the sector’s 4.9 per cent.

Over three years this outperformance is less significant, with the fund returning 10.3 per cent against its peer group’s 9.7 per cent, FE Analytics data shows.