The loss of the export engine that has driven growth in Asia could have positive long-term effects for investors as the region’s political leaders drive through reforms, a fund manager says.
Diamond Lee, who has been managing China, Hong Kong and Asian equities for over two decades, cautioned against attempting to generalise when it came to China’s companies, many of which were now far better managed than in the past.
But Lee, who joined Old Mutual Global Investors in November 2014, said the Chinese government’s market intervention in the summer was a “policy mistake”, though he believed the government had learned its lesson.
“Asia now has to drive its own future,” Lee said, when asked about the biggest theme to emerge since the financial crisis of 1997-98. “Export growth, combined with a restructuring of our banks, is what pulled Asia out of its recession.”
Today, he said, US baby boomers were reaching retirement age and paying down debt rather than spending, meaning “the export engine has been switched off. This could be structural, not cyclical. Now Asia has to rely more on itself to drive growth.”
Asked about the impact of this shift on investors, Lee said: “It is good in the long term but in the short run it causes problems. The [political] leaders want to engineer this transition anyway, but they thought they had 10 years to do it.
“That said, people don’t reform when the economy is doing well; they reform when their backs are against the wall.”
Lee sees change already in China, describing the anti-corruption drive initiated since 2012 as the “initial stage of downsizing the government”.
“We’re seeing officials resign to go into the private sector. That may not have been the original intent of the campaign, but a by-product is the state is dismantling its role in the economy from within,” Lee said. “It doesn’t matter how reform happens; it’s happening. And we’re just at stage one-and-a-half out of 10.”
Lee said he invested in fewer than 30 companies in China. He sees a “qualitative difference” between old state conglomerates and newer companies.
“Although there are some bad companies, generally the way managements make decisions, and how they run the business, is much better. When I meet Lenovo, they can tell me exactly what they plan to do, why they’re doing it, and how they’ll do it – and six months later, they’ll have gone and done it. That never used to happen.”
He cautioned against the “constant danger of labelling China as this or that”, adding: “Things could be better, of course, but some of these companies are excellent. China Vanke genuinely forms its own views about the property market and avoids foreign-currency mismatches when it borrows. In the same vein, there are some terrible property companies that just rode the cycle and probably won’t exist in five years’ time.”
And Lee believes the Beijing government has learned the lesson of its attempts to intervene in the market in spring and summer.
“The government let margin financing get out of control. Either they were too confident of their own abilities to manage it, or they didn’t realise the perils [of leverage],” Lee said.
“The government saved the market, but at a high cost, and that cost is a huge dislocation of resources. The government ultimately bought about 20% of the free float.”
