SINGAPORE (Reuters) - Hermes Investment Management’s head of emerging markets sees a huge opportunity in the Chinese economy’s transition from low-end to higher-end manufacturing and is also bullish on the country’s banks.
Speaking at the Reuters Global Investment 2018 Outlook Summit, Gary Greenberg said he thinks China’s authorities will struggle to wean their economy off high levels of indebtedness, and in order to cut debt as a proportion of economic growth, they will need higher productivity.
”Lo and behold, China is buying as many robots as it can. The increase in robots is unbelievable, in factory automation, in science, the internet of things, smart cities, smart factories, smart infrastructure, smart cameras.
“China is embracing industry 4.0, which is basically the marriage of industry and electronics. That’s a theme we are investing in as much as we can,” London-based Greenberg told the Reuters Summit in Singapore.
As part of that theme, Hermes’s Global Emerging Markets Fund, which manages $6 billion, holds stocks such as Chinese video surveillance product maker Hikvision (002415.SZ) and Alibaba (BABA.N), India’s Tech Mahindra (TEML.NS) and HCL Technologies (HCLT.NS) and Taiwan’s Advantech Co. (2395.TW).
Greenberg says that Hikvision, which has gained more than 150 percent this year, is the best performer in 2017 among his stocks.
His fund invests only in listed companies based in emerging markets. Greenberg’s team follows a mostly bottom-up approach to picking firms that are long-term compounders, meaning their returns are more than the fund’s cost of capital.
The fund is overweight on China, Taiwan and India and underweight Malaysia, South Korea and South Africa - positions which Greenberg reckons will extend into 2018. He doesn’t believe emerging markets are overvalued, although Mexico, the Philippines and India are seen as relatively expensive.
Greenberg likes Taiwan because the “quality of companies is very good. Capital ratios are good, payout ratios are good and technological level is very good.”
Although Hermes does not hedge its currency exposures and believes emerging market currencies are undervalued, the fund tries to avoid getting hurt by currencies that it deems are vulnerable to depreciation.
One such instance is Brazil, where Greenberg reckons the political paralysis and uncertainty heading into elections next year could hurt the real BRL= further. Hermes is neutral on Brazil, which effectively involves the fund having a large holding in a company that could benefit from a weaker real.
Greenberg says he is puzzled by why many Western fund managers stay underweight China.
”In America, a lot of people are convinced that China is just a house of cards about to fall in on its own.
“But if you go there, it’s not. After all, it is growing at a pretty decent rate, interest rates are low and there are thousands of companies to choose from,” he said.
He also disagrees with the view that Chinese banks are untouchable investments because of the country’s problems with high leverage and bad debt. He reckons China’s big four banks have a lot less bad debt than the world assumes, and his fund is long on the Industrial and Commercial Bank of China (601398.SS).
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Editing by Richard Borsuk