Investors should avoid most Asian cyclicals, especially if they compete with state-owned enterprises, a fund manager has warned.
Schroders head of Asian equities Robin Parbrook said there were “not many rays of optimism” in the China stock market, and his caution arose from 22 years of specialising in Asian equities.
Parbrook cited a European Union Chamber of Commerce in China survey, which analysed the key factors driving overcapacity in China.
More than half (56 per cent) of respondents said the main macroeconomic reason for overcapacity was local government policies aiming to attract investments.
Almost one-third (31 per cent) said the loose lending policies of government had a strong impact on overcapacity.
Directed lending, for example, to state-owned enterprises; tolerance for non-performing loans; and export-driven development models each account for 19 per cent of key factors (respondents could give more than one reason).
Five factors then accounted for 6 per cent each: the 4-trillion renminbi stimulus package of 2008/09; a lack of dividend policy at many companies; a need for ‘full employment’ to stave off social pressures; low interest rates; and a high level of foreign exchange reserves.
Parbrook said, however, there was some good news on China. “There is some truth to talk that Asia is decoupling from the West,” he said.
UBS stress index figures from September 2011 showed Asia down at two on the index in 2010, in contrast to developed markets up at 8 on the index in 2010.
Real gross domestic product growth, according to UBS, was 6 per cent year on year (y/y), mid-weighted, in 2011, whereas developed countries were at 2 per cent y/y, mid-weighted in 2011.
Real domestic consumption growth for emerging markets was 6 per cent y/y in 2011, while developed countries were at 1 per cent y/y, according to UBS.
“But, the good news stops there,” Parbrook said.
The MSCI China Index was a “structurally unattractive index”, he said, because state-owned enterprises were 48 per cent of the weight in the index, followed by red chips and other, comprising 26 per cent each.
“State-owned enterprises, unsurprisingly, tend not to be big creators of shareholder value,” he said.
