A lack of clarity on tax, foreign exchange and central bank policy is deterring Baillie Gifford’s Richard Sneller from buying in mainland China, even though he views it as a strong opportunity.
The fund manager has roughly 17 per cent of his portfolio in China, but this has been achieved solely through Hong Kong-listed H-shares, rather than Shanghai-listed A-shares.
Mr Sneller has co-managed the Baillie Gifford Emerging Markets Growth fund for more than a decade, in which time the fund has returned 235 per cent versus its benchmark’s rise of 183 per cent, data from FE Analytics shows.
In the past five years it has only narrowly outperformed the index return.
Mr Sneller said in spite of the Hong Kong-Shanghai Connect scheme, which has made foreign investment in China easier, there were still issues preventing him from buying in fully.
“We do spend time looking at the A-share market but we’re not there yet,” he said.
“We will be looking to have direct investments, but there are some technical issues that are holding us back.”
The manager said these issues included a lack of clarity surrounding how capital gains tax was levied on investments.
“Many funds have had to make provisions for potential taxation,” he said. “There has been some clarity but there is still a lack of clear detail.”
Mr Sneller added there were issues surrounding foreign exchange, as well as the flow of money in and out of the country when stocks were purchased and sold.
“There is an element of discretion by the central bank in terms of taking large amounts of money out,” he said.
The manager’s biggest bet is information technology, especially firms targeting emerging market consumers.
“We have 50 per cent of the portfolio in IT companies, which is a very large position, but we are excited about them as we feel the valuations are failing to understand the long-term shifts in consumer behaviour,” he said.
Mr Sneller said he and his team had a “better handle” on how quickly trends in technology could change compared with peers.
But he acknowledged this was the “biggest risk” to the portfolio given investors could sometimes get “too excited about technology companies like they did in 1999-2000”.
Elsewhere, Mr Sneller said while he and his team followed the Baillie Gifford style of bottom-up, long-term investing, the market cycles in emerging markets were often “shorter and sharper”, so the macro was not ignored.
The manager said given the amount of infrastructure and property investment China would be making was likely to fall, he was “fairly negative on a top-down macro view” on countries such as Brazil and South Africa, which were strongly linked to the materials cycle.
The fund also has 20 per cent in India. However, Mr Sneller said he started building up the position in 2012 – well before the election of Narendra Modi – centring on IT outsourcing companies with profits derived outside of the country.