China bulls aren't hard to find. The Middle Kingdom's rise has been the investment story of the decade, prompting the launch of several dedicated China funds and managers who enthuse about the prospects for Chinese companies. China sceptics are thinner on the ground.
Step in Asia expert Hugh Young, who has more than 25 years' experience of managing Asian equities. The managing director of Aberdeen Asset Management Asia is responsible for managing £27.5 billion across the continent, heading up the investment management of Aberdeen's portfolio of open-ended Asian funds, plus a portfolio of Asian investment trusts, including Aberdeen New Dawn Investment Trust which we tipped in September 2010.
Last year was a fantastic year for the Asian economies, with earnings from Asian stock markets increasing dramatically. However, Mr Young points out that the previous year was pretty awful, so a fair bit was recovery growth.
While the growth aspects of Asia "still look dandy", he is lightweight in China. "China is an exciting story if you are holding your sales hat. But how you make money from it is not easy," he says.
China, whose economy was one of the fastest growing, had the worst-performing stock market in Asia in 2010 (US dollars, total return). "Just because an economy is growing 10 per cent doesn’t mean you will make money in the stock markets," says Mr Young. "China has been exceptionally disappointing."
China wants to move away from the global outsource model, raise productivity, shift growth inland and stimulate more private spending. Its growth is becoming better balanced and the next big story is urbanisation. However, there are still problems.
"Our issues with China are not macro-economic," says Mr Young. "But from a macro-economic point of view China does face the major issues of inflation and bubbly property prices." Although Chinese inflation on the surface looks low, he says if you look at electricity usage it is more like 10 per cent.
Hugh Young
As for the Chinese property market, he says "it is hard to know where the truth lies". However, in China there is "quite a bit of hard evidence that direct property is well funded by equity rather than debt".
"We worry more about debt at a local government level in China, for example, skyscrapers being built for no particular reason, rather than worrying about apartment blocks. The question is: Are these big public works projects the right projects, and what will be the returns on investment?"
"Asia has a deep-seated love of property and the first recourse is to property rather than to the stock markets. Property is their passion and there aren't many state pension schemes around." Taking all of this into account, he is overweight real estate vis a vis the benchmark. "The money coming into China is a concern but it is largely institutional money from overseas - not 'hot' money."
However, Mr Young says the main problem with China is lack of quality at the company level. His team has spent a lot of time visiting Chinese companies but haven't found many that they like. "We find it difficult to find that many Chinese companies that are run for shareholders' benefit," he says.
Instead, he invests via companies domiciled outside China - mostly in Hong Kong, but some in Singapore that have business going into China. Typically he says companies in Hong Kong and Singapore are the longest running and have the best corporate governance in the region. "They are the 'tortoises' of the region - they won't shoot the lights out," he says.
Stocks in China divide between massive state-owned companies, where the state decides on major decision and smaller companies where "we're not quite sure how they get their start up and what favours have to be repaid, and not too sure of the management behind them".
In the regional funds Aberdeen holds state-owned PetroChina, the country's biggest oil producer, and China Mobile, which controls the vast majority of its domestic mobile services market, and has been "surprisingly pleased how well they have been run".
He admits "our way of investing is pretty cautious", preferring to meet companies several times and see their record in tough times first before making an investment. "One moment you can be China's most successful businessman and the next minute you are behind bars," he says, referring to Huang Guangyu, the Chinese electronics tycoon who founded Gome Electronics and once the country's wealthiest man, who in 2010 was jailed for 14 years for bribery, insider trading and illegal foreign exchange dealings.
| Hugh Young CV |
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Hugh Young is managing director of Aberdeen Asset Management Asia Limited, the Aberdeen Group’s regional HQ and group head of equities as well as a member of the executive committee responsible for the Aberdeen Group’s day-to-day running. He founded Singapore-based Aberdeen Asia in 1992, having been recruited in 1985 to manage Asian equities from London. Since then he has built the company into one of the largest managers of such assets globally. His early career included spells at Fidelity International and MGM Assurance. He graduated with a BA (Hons) in politics from Exeter University. |
Chinese companies that Mr Young does invest in include sportswear retailer Li Ning. The brand, which was founded by former gold medal gymnast Li Ning, now has more than 7,900 stores across China. It is among the first Chinese brands trying to find a footing in the US.
Other exposure to the country is via Sino Gas & Energy, an Australian company focused on exploring and developing unconventional gas assets in China. Through its wholly owned subsidiary, it has operated in Beijing since 2005.
He also holds China Resources Enterprise, which focuses on consumer businesses in both the Chinese mainland and Hong Kong, with core activities being retail, beverage, and food processing and distribution.
Preaching a note of caution on Asia as a whole, he says: "Our best hope is that Asian markets don't do much this year and we are here next year talking about value."
