Is China starting to look like its old reliable self? That was the question for the fixed income manager at Barclays that pitched investors about index-tracking products in China. What seemed most appealing to the fund manager was the yields on very long-term debt. The junior credit companies in China’s corporate bond market already offered yields that were around 4 percentage points more than investment-grade Western corporate debt.
That comes in handy when a region as large as Asia needs to raise billions of dollars to plug any holes in its fiscal balance sheet. It’s the key consideration in emerging markets where a decline in foreign capital inflow has left the funds to be invested in safe investments at a time when economic growth slows and policy could be changed in a hurry. Although the planned change to US corporate tax rules in 2025 might also act as a catalyst for investments in the US — but analysts at both Goldman Sachs and Societe Generale this year said there was less reward for such an investment.
Mark Mobius, the London-based investor who manages the $28 billion Templeton Emerging Markets Opportunity Fund, favors India and Thailand over China’s stocks. India and Thailand are known for better governance in addition to macroeconomic stability, and India has a cheaper stock market, according to the fund manager. There is also less political risk in Thailand, he added. Indian stocks are cheaper than the Chinese market, he said, where corporate governance has been shaky and some stock prices are vulnerable because companies are able to tap into central bank liquidity programs. Mobius’s fund returned 3.3 percent in the first nine months of this year, beating 92 percent of its peers.
China’s infrastructure booms have also given Mobius a particular interest in the stock market. The manager is looking to invest in similar companies — like utility companies and contract mining companies — that could generate high returns on capital. He likes the stocks of Haixia Group and Zefco Holdings because both have relatively low debt levels and a history of raising new capital to invest in the capital project in China’s north. Mobius expects Baoneng Coal Group, a Chinese coal miner based in Gansu province, to also attract strong demand because it provides modern coal technology that helps to increase the amount of coal that coalmines can extract from a single pit. Zengzheng Coal Group, another sector play, manages coal mines that produce coal pellets. Mobius also owns Gemdale, a company with some steel assets that is controlled by Japanese investors.
“China’s stock market has been mostly the same for the last 10 to 15 years,” Mobius said. “I think it has an opportunity to change directions. The government is opening things up and other people are coming in. Chinese management knows what is wrong with their economy and wants to change it. I think they will do that very quickly and it will be a very, very good stock.” He added that he expects a flat market in China in the next 12 months.