Sanlam Investment Management (SIM) has deployed more than a third of its global emerging markets fund into Chinese equities, a bet premised on an expected consumer-led recovery in the Asian economy now that it has dropped its zero-Covid policy.
Feroz Basa, head of global emerging markets at SIM, has allocated 36.9% of the fund’s $179.1m (R3.5bn) in assets to China, by far the biggest allocation to any one country included in the developing nation-focused investment vehicle. The next biggest country allocation is Taiwan (8.4%) followed by Mexico (8.3%), India (7.5%), South Korea (7.2%), Brazil (5.8%) and SA (3.1%).
“We’ve got close to 37% of our fund in China — this is the most we’ve ever had invested in China from our fund since I’ve been managing emerging markets,” Basa said in an interview. “That says a lot about our levels of conviction in China.”
Central to Basa’s thesis is the economic recovery he is seeing in China after its decision to abandon the zero-Covid policy that saw extreme lockdowns and testing for the virus from early 2020 to end-2022 when the most severe aspects of the failed strategy were dropped. While that disrupted economic activity and manufacturing for almost three years in the country of more than 1.4-billion people, Basa says it has also resulted in attractive equity valuations.
“They’re moving out of the zero-Covid policy and they have a lot of potential to stimulate the economy because they don’t have the same inflationary issues as the US and Europe — they didn’t overstimulate like the Western world during the pandemic,” says Basa. “Most of the companies we own in China have very good management teams with net cash on the balance sheets. The valuations are also extremely attractive.”
To gauge valuation, SIM prefers to use the Shiller price-earnings (P/E) ratio, a cyclically adjusted valuation measure based on average inflation-adjusted earnings from the previous 10 years. Using that measure, US equities are trading on a Shiller P/E of 26.6 times compared with only 11.2 times for global emerging markets.
However, looking at the standard P/E ratio of the Shanghai Stock Exchange reveals a P/E of 13.6 times. That is still very attractive compared with the rather expensive S&P 500, which has a P/E ratio north of 24 times.
But it is the pent up demand in China after its post-pandemic reopening that has Basa excited. Citing CEIC data he says the net increase in Chinese household deposits since the start of 2020 is close to $7-trillion, a staggering number that is larger than Japan’s GDP of $4.9-trillion.
“Chinese households have been saving and have significant resources on hand,” he said. “Company earnings are still relatively low ... so our underlying thesis is that pent up demand is going to come through and China is going to emerge stronger.”
Even so, Basa is not sold on every sector of the Chinese economy. He has zero exposure to Chinese banks or property companies and instead favours the consumer, industrial, tech and pharma sectors. One of his favourite sectors is Chinese entertainment with gaming company NetEase accounting for 3.9% of his portfolio while e-commerce staples such as Alibaba (2.5%), JD.Com (3.5%) and Pinduoduo (2.9%) are also well represented.
Interestingly, he has zero direct exposure to Tencent compared with the benchmark index allocation of 4.7%. Instead, Basa prefers to invest in Prosus, which comprises 5.4% of his portfolio and acts as its de facto Tencent proxy. He also has 2% of the fund allocated to Chinese computer maker Lenovo and 4% in Fou Shu Yuan, a listed funeral services and burial company.
Non-Chinese favourites include Taiwan Semiconductor Manufacturing Company (TSMC) with a 5.6% holding and Samsung Electronic at 3.8%. Yet given the high weighting to China and Taiwan, which together account for 45.3% of Basa’s emerging markets portfolio, it would appear that Basa is ignoring the rising geopolitical tension between the US and China, which some analysts have said may be a precursor to potential military conflict between the two economic superpowers.
“The tensions between the US and China over Taiwan are a risk, but we think it is less likely that China will take the same route that Russia did with Ukraine,” said Basa. “Xi Jinping is not Vladimir Putin — he’s a bit more level headed. But if there is a war over Taiwan it won’t just be our Chinese holdings that would fall off significantly. Globally everything will come under severe pressure.”
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