China has been on a bumpy ride over the last couple of years as offshore investors soured on the world’s second-largest economy.
Buffeted by a property market crisis, slowing growth and rising geopolitical tensions, Chinese share indices plunged to decade-long lows at the start of 2024.
China stocks have subsequently bounced off the bottom… twice, largely in line with will-they-or-won’t-they bets on the timing and size of government stimulus packages.
Following up on an aggressive central bank monetary easing in September, media reports late in October suggested the Chinese government is about to approve a US$1.4 trillion boost for its flagging economy.
Christine Phillpotts, Ariel Investments emerging markets portfolio manager, said the Chinese leadership was almost certainly awaiting the result of the Trump v Harris US electoral battle this week before finalising the amount of the fiscal booster shot.
“The US election outcome will influence the stimulus decision,” Phillpotts said.
But while such macro factors come into play in the Ariel strategic thinking, she said the manager’s current upbeat, and contrarian, position on China was based on an assumption of “no meaningful change to the status quo”.
“We’re bottom-up driven,” she said, highlighting companies that have thrown off double-digit returns on low valuation multiples such as the Great Wall Motor Company (producer of the well-known – in NZ but not the US – Haval brand, among others).
The US-headquartered value manager tipped from a slight underweight to an over-index exposure to Chinese stocks in its nascent Emerging Markets (EM) Value portfolio this April.
According to the September quarter report, the Ariel EM strategy held more than 33 per cent in China shares versus the just over 27 per cent for the MSCI benchmark.
The Ariel contrariness applies to the strategy’s biggest under-weight, too, with its India exposure of about 9 per cent equating to less than half of the 19 per cent plus the country represents in the MSCI EM index.
“There’s some great companies in India but the valuations are priced to perfection,” Phillpotts said.
In Australia last week to garner support for the still-emerging Ariel EM institutional strategy (which also comes in an ex-China flavour), she said the firm sees better value in countries including the Philippines and Vietnam.
But overarching financial and governance metrics such as current account deficits and debt do place most of the 50 or so nations in the MSCI EM and ‘frontier’ indices off-limits.
“We’re invested in 17 countries,” Phillpotts said, of which almost 10 per cent fall under the frontier label.
Somewhat lost in the US ‘mag 7’ narrative of recent months, EM indices outperformed developed markets over both the June and September quarters.
Over the nine months to the end of September, the MSCI EM gauge was up close to 11.7 per cent (in NZ dollar terms) versus over 21 per cent net of fees for the Ariel strategy that has raised NZ$21 million since launch in April 2023.
Phillpotts joined the Chicago-headquartered manager in April last year along with four other emerging markets specialists at AllianceBernstein in a team headed by Henry Mallari-D’Auria.
Mallari-D’Auria, later promoted to Ariel chief investment officer for EM and global equities, has already made a couple of trips to Australia and NZ to sound out local institutions.