MLC Investment Management is suspicious of the relentlessly upbeat talk about China as an investment opportunity and so is sending two staff to Shanghai in January to do some on-the-ground research.
Brian Parker, MLC’s investment strategist, is concerned about the almost-uniform praise for all things Chinese. “When everyone is singing from the same hymn sheet, when everyone’s bullish about the same thing, I get really scared,” he said. “I’m a contrarian at heart. We [at MLC] are contrarians and sceptics at heart.”
Parker, a trained economist, is concerned that the West is trying to turn China into a free-market economy but the problem is that it’s run by micro-managing command-economy bureaucrats, particularly at the local level. “When you have a private-sector macro-economy, micro-management is pretty damned hard.”
He cites vacancy rates of up 20-30 per cent in Beijing and Shanghai for the past three to four years, due to the command-economy thinking that builds factories and hopes demand will catch up. “It’s a ‘build it, and they will come’ mentality,” he said.
India is the sleeper in Asia, Parker said. “India has a lot of things going for it: English language, rule of law, democracy is a good, it’s a long-term investment story, it has a rabid free press, and parliamentary democracy.
“India, until recently, got a bum rap for investment. It was viewed as a lumbering giant, with second-rate infrastructure, roads, and rail. But this is changing.
“People would say in China, they just get things done, but that’s what they do in dictatorships. But, China is a brilliant long-term story. In 30 to 40 years, it’ll be the second largest economy in the world after India by sheer weight of numbers.”
MLC also has its private equity team researching in India, but Parker is quick to add that it’s not just a matter of buying equities in China and/or India. “If the good economic story is already reflected in the share price when you go in,” Parker cautions, “then you will do very badly, and that is the problem with a lot of funds. If it’s a good economic story, then that’s factored into the price already.”
So, who ultimately wins out of emerging markets? Parker questions the theory that it’s the thriving middle classes in those countries.
“The companies that win out of this may not necessarily be listed in China. They may be listed in New York or London or in Sydney. In the S&P500, 50 per cent of their earnings come from outside the US and the earnings growth is coming from the emerging world,” he said.