Aberdeen AM Looks to Grow In China

Shanny Basar

The Chinese stock market has swooned by about 40% since June, on concerns that the Asian giant’s powerful growth story is over.

But institutional investment managers are looking past the short-term pain on the premise that China remains a relatively attractive investment opportunity in a slowly expanding world economy. The Shanghai Stock Exchange Composite Index’s current level of about 3,050 is almost 2,000 points lower than it was four months ago, but even a partial rebound to 4,000 in three years’ time would mean annualized gains of almost 10%.

Anne Richards, chief investment officer and head of EMEA region at Aberdeen Asset Management, said the UK firm will hire and build a research team in China as the savings culture in the country expands.

Last month China granted Aberdeen a Wholly Foreign-Owned Enterprise (WFOE) business licence enabling a newly-created subsidiary to set up an office under the pilot Free Trade Zone in Shanghai. Aberdeen has had a representative office in China since 2007 which has mainly performed liaison work.

Hugh Young, managing director of Aberdeen’s Asian business, said in a statement:  “While we welcome China’s steady market opening and we’re thrilled to gain our WFOE licence, we will proceed slowly. It’s important to maintain our investment disciplines and assess opportunities carefully. While the asset management industry there is young and the potential huge, our vow is to avoid ‘short-termism’ and focus on quality.”

At the Bloomberg Most Influential Summit held Oct. 6 in London, Richards agreed that Aberdeen has a long-term view and does not approach markets as trading opportunities.

She continued: “We don’t think the Chinese economy has fallen off a cliff and we are investing there through Hong Kong and other proxies. As the savings culture expands we will hire people and build our research team on the ground as we have done in other countries.”

Richards added that investors should focus on the absolute growth in the Chinese economy. “Even if the rate of growth has slowed, 5% of a very big number is bigger than 10% of a smaller number,” she said.

Davide Serra, chief executive and founder of hedge fund Algebris Investments, said at the Bloomberg summit that the Chinese have successfully shifted their economy from 70% construction and manufacturing to 70% services. “For the first time since in three years we are long China,” he added.

Serra explained that in the past 45 years, $8 trillion of capital had pushed into emerging markets. “China has a closed current account and real rates are 4%, and have only been higher three times in the last 40 years, so the central bank still has bullets,” he said.

Five to six years ago Hugh Hendry, founding partner of hedge fund Eclectica Asset Management, feared that China would not be able to sustain a 10% growth rate.

At the Bloomberg summit Hendry said: “My prophecy was half-correct as growth is 3% to 4% but that is nothing to sneeze at. For the life of me I cannot do justice to the critique that the tail risk in China is on a par with the US in 2008 and the key is the value of the currency.

Hendry added that China has an expanding current account and growing exports so the currency is not overvalued.

The Institute of International Finance said in a report today that non-resident outflows from dedicated China funds were $14bn in the third quarter of this year and total outflows from offshore funds investing in Chinese assets were over $10bn – representing over 20% of all net outflows from emerging market funds. The IIF said the bulk of the outflows from Chinese funds was driven by non-residents, while Chinese residents have been net buyers of Chinese fund shares.

The report said fund allocations to emerging market bonds and equities are at their lowest since early 2009 due to falling commodity prices, disappointing earnings, rising corporate debt levels and, in many cases, domestic political tensions.

“While the overall stock of emerging market assets held by mutual funds and ETFs fell significantly in Q3, the decline was highly differentiated: Brazil, Indonesia, China, Saudi Arabia and Turkey recorded much greater reduction in allocations,” added the IIF.

Feature image by Iakov Kalinin/Dollar Photo Club

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