China is a complex market, but there are a few promising entry points for the determined investor, Frontier Advisors’ Chris Trevillyan argues.
Trevillyan, who is director of investment strategy at the asset consulting firm, said he embarked on his most recent research trip to China “hoping to get insight but came away more confused”.
While there, he saw two presentations by people with a Chinese background, both of whom were “steeped-in-China academics”.
“The first one came out and said everything was great; the second one came out and said the exact opposite, basically,” Trevillyan said.
His general advice to Australian super funds wanting to tap investment opportunities in China is to take a detailed look at its A-share market, which is traded on the Shanghai and Shenzhen exchanges.
The degree of volatility in the China A-share market is “hugely confronting”, Trevillyan said; however, this raises “really big opportunities” for active management.
“I certainly wouldn’t be saying to go passive into A-shares,” he said. “There is a lot higher potential to get active management. As the market is opening up, and as it becomes more available, I think that’s how our clients will start to move.”
Active management is essential for two reasons, Trevillyan said.
“Firstly, the old-economy industries, the resources-related ones, they are looking pretty cheap – but for good reason – while the consumer-related stocks certainly do not look cheap,” he explained. “Secondly, the index is horrible because it’s full of things investors wouldn’t want to own and it doesn’t represent the economy’s GDP.”
Trevillyan made his comments at the Investment Magazine Fiduciary Investors Symposium, in Healesville, Victoria, November 13-15, 2017, in a presentation titled, ‘President Xi and China’s big reshuffle’. The session was facilitated by Columbia Threadneedle Investments head of institutional sales and product development, Asia-Pacific, and head of Australia, Jon Allen, who at one point asked about fears of a correction.
Outgoing People’s Bank of China governor Zhou Xiaochuan startled Westerners at a side meeting of the National Congress of China’s Communist Party on October 19 when he said: “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky moment.”
Allen asked Trevillyan what he made of such worries. Trevillyan said one analyst he spoke to thought Chinese authorities were just trying to confuse Westerners so that they didn’t know what was going on. He also warned that in addition to the dangers of a collapse in asset prices, sudden or otherwise, Australia would also be adversely affected if China faced a debt crisis.
China’s debt has grown significantly, especially corporate debt. But Trevillyan expressed some confidence in the system.
“China is still a relatively closed financial system and they do have different levers to pull to manage it,” he said. “So, we certainly aren’t of the opinion that a China credit crisis is about to occur; we think they’ve got the levers to pull to help.”
