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Ehrmann bottom of sector

Created:

3 December 2008

Written by:

Moira O'Neill

Poor performance on the Jupiter China fund has left investors nursing a massive 52 per cent loss since the start of this year and the fund currently sits second from the bottom of its sector.

Manager Philip Ehrmann says his overweight stance in mid and small cap growth stocks mostly accounts for the underperformance, despite solid earnings prospects for these companies. "Since the global equity turmoil began in August 2007, investors' risk aversion has hit medium and small-sized companies harder than their larger peers across the world," he says.

Mr Ehrmann has managed the Jupiter China Fund since launch in October 2006, and was previously head of global emerging markets at Gartmore.

He thinks recent statistics show signs of an orderly economic descent in China rather than a lurch into recession. He expects consumer spending to remain relatively resilient. "The government is likely to boost consumer demand through income tax cuts, if confidence continues to waver."

He thinks that Chinese equities are at the lowest level since the SARS scares of 2003, presenting an excellent opportunity to increase exposure to growth stocks in the sectors which are likely to benefit from government measures.

However, he sees pronounced weakness in a number of key areas that have driven China's dramatic economic progress over the last few years, ie property, basic industries and exports. He expects inflationary pressures to ease further and as a result expects some cyclical industries to see profits squeezed further as product prices fall. He has reduced exposure to property, resources and cyclical industrial sectors.

"I also remain underweight the financial sector as bank's valuations are among the highest in the world, despite the prospect of increasing non-performing loans," he says.

"China's weaker property market is likely to result in some smaller private developers experiencing liquidity problems. In addition, falling export activity continues to affect manufacturers of low value-added products. It appears inevitable, therefore, that a need to bolster reserves for potential shortfalls will eventually weigh on the banking sector."

Source: www.ft.com/funds *Morningstar

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