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April 2014
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“We’ve had virtually no exposure to EM in the last three years. That was not a [market] consensus view,” Bell Asset Management’s Chief Investment Officer Ned Bell told theinstoreport.
“[But] we looked at the companies and we thought the valuations were very high.
“It has been good that we missed it. But now we have spent some time looking at a few specific stocks and companies. ”Bell Asset Management portfolio manager Adrian Martuccio has just returned from a research trip that included China.
Martuccio said part of the reason for the trip was to see whether it was time to get back into Chinese companies.
“We have generally played that market through Hong Kong stocks,” he said.
“We had a very big overweight prior to the global financial crisis, but when the economy started to slow down, we sold all of our positions and we have been sitting on the sidelines.
“[But] the valuations now look pretty cheap and so we needed to reinvestigate.” Martuccio looked at a number of property, gaming and financial stocks.
“Traditional stock valuations are a lot more attractive than going back a couple of years, but
the problem is that the growth element is just not there anymore,” he said. “We made a lot of money prior to the GFC (global financial crisis) with China Mobile. It was a company that had virtually no competition.
“Today China Mobile has virtually no growth. Even though it looks cheap, there is just no
growth there.” A number of fund managers have noted opportunities in Greater China, especially in
Macau-based casino companies, a sector that has benefited in recent years from a liberalisation of gaming laws.
“These [casinos] have been doing a really great job and some of these stocks have been growing like a house on fire,” Martuccio said.
But he said he was not optimistic about the future prospects for those companies either.
He said he was concerned about potential increases in the tax rate on gambling revenues, which currently stood at 39 per cent.
The local government has a history of lifting tax rates in the sector and fears are that it will seek a large upfront payment.
The number of development proposals for new casinos also seemed to outstrip the available licences, Martuccio said.
“Some of the companies that made a lot of money are now rolling out their second or third casino, and if you add it all up you get 4000 licences; it just doesn’t add up,” he said.
“Something is going to break and that is probably on the tax side. We are not rushing into the casino stocks at the moment.”
The financial sector in China is still plagued by the shadow banking problem. “With financials, there are lot of concerns about the quality of loan books. For us, there is no reason to get back in there,” Martuccio said.
“The low hanging fruit is behind us.”
When applying these findings with a macroeconomic overlay, the remaining appeal of China evaporates quickly.
“Company profitability is just really starting to slow. China’s advantage was labour arbitrage as a result of low wages, but that is slowly disappearing,” Martuccio said.
“We’ve had virtually no exposure to EM in the last three years. That was not a [market] consensus view,” Bell Asset Management’s Chief Investment Officer Ned Bell told theinstoreport.
“[But] we looked at the companies and we thought the valuations were very high.
“It has been good that we missed it. But now we have spent some time looking at a few specific stocks and companies. ”Bell Asset Management portfolio manager Adrian Martuccio has just returned from a research trip that included China.
Martuccio said part of the reason for the trip was to see whether it was time to get back into Chinese companies.
“We have generally played that market through Hong Kong stocks,” he said.
“We had a very big overweight prior to the global financial crisis, but when the economy started to slow down, we sold all of our positions and we have been sitting on the sidelines.
“[But] the valuations now look pretty cheap and so we needed to reinvestigate.” Martuccio looked at a number of property, gaming and financial stocks.
“Traditional stock valuations are a lot more attractive than going back a couple of years, but
the problem is that the growth element is just not there anymore,” he said. “We made a lot of money prior to the GFC (global financial crisis) with China Mobile. It was a company that had virtually no competition.
“Today China Mobile has virtually no growth. Even though it looks cheap, there is just no
growth there.” A number of fund managers have noted opportunities in Greater China, especially in
Macau-based casino companies, a sector that has benefited in recent years from a liberalisation of gaming laws.
“These [casinos] have been doing a really great job and some of these stocks have been growing like a house on fire,” Martuccio said.
But he said he was not optimistic about the future prospects for those companies either.
He said he was concerned about potential increases in the tax rate on gambling revenues, which currently stood at 39 per cent.
The local government has a history of lifting tax rates in the sector and fears are that it will seek a large upfront payment.
The number of development proposals for new casinos also seemed to outstrip the available licences, Martuccio said.
“Some of the companies that made a lot of money are now rolling out their second or third casino, and if you add it all up you get 4000 licences; it just doesn’t add up,” he said.
“Something is going to break and that is probably on the tax side. We are not rushing into the casino stocks at the moment.”
The financial sector in China is still plagued by the shadow banking problem. “With financials, there are lot of concerns about the quality of loan books. For us, there is no reason to get back in there,” Martuccio said.
“The low hanging fruit is behind us.”
When applying these findings with a macroeconomic overlay, the remaining appeal of China evaporates quickly.
“Company profitability is just really starting to slow. China’s advantage was labour arbitrage as a result of low wages, but that is slowly disappearing,” Martuccio said.
