'Cheap and hated' China market packed with opportunity
Describing China's A share market as 'a stock pickers' paradise,' T Rowe Price's Eric Moffett is among a cohort of professional investors rushing to identify the best opportunities.
Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by T. Rowe Price's Eric Moffett to talk about opportunities in the China stock market.
Hi, Eric.
Eric Moffett: Hi.
Wall: So, we've talked quite a lot over the last year about the dangers and risks in investing in China and Asia, the Trump trade war, the slowing growth. But I thought today we could have a bit more of a positive stance and talk about the opportunity set, because there are still plenty of investment opportunities here, aren't there?
Moffett: There are indeed. And right now, in China's A share market, I'm seeing more opportunity than I ever have. It's like a Black Friday sale where everyone is rushing to get the deals. And it's a stock pickers' paradise, because with the China A share market we've got a massive market that's liquid and deep, it's very cheap and hated and it's extremely inefficient. So, as we hunt in that market today, we are finding lots and lots of opportunities. Now, we are not the only ones there. In the last four days alone, there has been $4 billion of foreign money flooding into the market compared to $9 billion in just all of the last month. So, these opportunities may not last forever and so, we are working very, very hard to find them before others do.
Wall: And the A share market is one that typically international investors have been, shall we say, cautious about versus the A share market of stocks listed here in Hong Kong because they have some concerns about transparency, because they have some concerns about corporate governance. Do you think these are largely overstated? I mean, is it actually a reasonably, as you suggest, easy place to invest?
Moffett: Well, you can't make blanket statements about the market. There are definitely pockets that are overvalued, that have dodgy companies, poor transparency. This is why you don't buy an ETF. This is why you don't go passive when it comes to China A. You definitely, definitely want someone who is actively sort of sorting the wheat from the chaff. If you look at the blue chips though, the place where I and other foreign investors are hunting, there's some really good stuff there. And while foreign investors only account for about 3% of the market today, there are certain large-cap blue chip stocks for which the ownership is approaching 30%, foreign ownership, which by the way is a cap. So, I think, there's a part of the market that's extremely attractive, but there's a lot of stuff that's best ignored.
Wall: Let's talk a bit about those blue chips then. Are there any particular sectors at the moment where you are thinking that they are ripe for the picking?
Moffett: Yeah. You know, I'd say that the common theme here is that they tend not to be related GDP growth rate or trade wars, a lot of these scary headlines. So, that's a good thing. Some of them include – in healthcare, there's an immuno-oncology company just coming up with ways to make our immune system fight cancer. That's a pretty good thing and that's not related to Trump or the GDP growth rate or any of those things. Also, in high-tech, industrial high-tech, there's a company involved in lasers used to make things, iPhones and other things. Used to be this was a lot of foreign technology, but there's a local player doing a good job. There are also boring companies that just make appliances.
One of the ones that has the highest foreign ownership today is called Midea. They make air conditioners and other appliances, but half the business is exporting. And a lot of local investors find it a horribly boring company. I mean, gosh, selling air conditioners is – but I mean, it's a really good company, blue chip company, good balance sheet, sensible management, they meet investors, they like to tell you things and they want more foreign shareholders and that's just a – it's a beautiful thing. So, it's just a great time to be an investor in that market today.
Wall: And you've alluded to it slightly in that answer, are there any particular areas that you are avoiding? I'm guessing it's those that are sensitive to the scary headlines.
Moffett: Well, I'm, although I would say that stuff that's linked to the scary headlines has been decimated. Anything cyclical or trade-related has been absolutely decimated. I mean, it's important to remember that China's domestic stock market was the worst single market last year, the worst. And it trades at some of the cheapest valuations of any major market in the world. And negativity among local investors is worst than I've ever seen it. Cash flow (wasn't) very high. So, there's a lot of stuff kind of related to the headlines that's spring-loaded to respond to any good news.
I'll give you one example. One area I'm looking at now is the auto sector in China. So, as you may know, auto sales are down double-digits. It's just a mess. Inventory levels are huge, which means they got to discount to close inventory. It's just bad headline after bad headline. But the stocks have already collapsed. And while a lot of local investors look at the market and think, oh, my gosh, sales down, that's never happened; maybe that's it for growth. It's just a simple cyclical slowdown. It's an ugly one. It doesn't feel very good. But a lot of investors here have never thought of autos as being a cyclical market like we do in the rest of the world. It's become one. We're in that scary part of the cycle. But valuations in my opinion more than bake that in. And over the long term, the cars per 1,000 in China which are now about 200, clearly can go about up to 500, 600 that we see in Korea and Japan. So, that's another area that is trade-related, I guess, you'd say, but I think has a lot of potential.
Wall: Eric, thank you very much.
Moffett: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.