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Seafarer’s Prevailing Winds articles on China and other part of emerging market are very informative. They are one of the reason that I am very light on EM exposure even though it suppose to represent future growth.
It's funny but this is the proverbial "blood-in-the-streets" moment discussed in another thread. But I bet few takers. The ETF ECNS for instance currently has a p-e ratio of 5 and a price-book ratio of 0.6. Those are Ben Graham levels of cheapness for over a 200 stock portfolio. Need steel cajones to invest in it though.
Were there many Chinese stocks delisted from major U.S. stock exchanges for failing to follow the GARP and auditing requirements ? I would not touch ECNS, perhaps only through experienced managers.
Glad to have that available, LB. Thank you. Foster writes with precision, even eloquence, if I may say so. I was in his fund several years ago and left it after disappointing returns. Surely, it was not all his fault. He is as sharp and smart as can be.
@Crash: it appears that the author of the piece is Nicholas Borst of Seafarer. @LewisBraham: M* offers an AI analysis of ECNS, as one might expect. A fund that was a top-quintile performer in 2021 while gaining 2% and then losing 42% in 2022 might make anyone queasy.
@Benwp I completely agree about the volatility and risks. But I don’t think any blood-in-the-streets investment comes without that. This is why theoretically value investing works, the psychological toll those kinds of investments take to make. What is interesting in this case is instead of individual stock risk as the ETF is widely diversified, there is country risk. Instead of analyzing whether, say, Bank of America or Washington Mutual, will survive 2008, one is analyzing whether some form of capitalism will continue to exist in China and what that will look like if it does.
@LewisBraham: thanks for that comment, with which I agree. The country risk seems to be ratcheting up. Among a number of very troubling developments over the past couple of years, Xi’s ouster of those politicians who represent a threat to him was vividly captured on a video analyzed by The NY Times this week. Forget traditional respect for one’s elders in Xi’s China, just have the previous leader removed from his seat at the side of the Chairman by cooperative underlings.
President Xi is concerned about holding power, and by extension, avoiding social unrest. He and the Chinese Communist Party will interfere in the economy to facilitate the party's political goals. Needless to say, return on equity will not be prioritized. Expanded state control of the economy may lead to unsatisfactory investor outcomes.
Here is the background on Nicholas Borst of Seafarer, who @BenWP mentioned.
Nicholas joined Seafarer Capital Partners in 2018. He is Vice President and Director of China Research. Prior to joining Seafarer, Nicholas was a senior analyst at the Federal Reserve Bank of San Francisco covering financial and economic developments in Greater China. Previously, he was the China Program Manager and a research associate at the Peterson Institute for International Economics. Nicholas has also worked as an analyst at the World Bank.
Nicholas’ research and commentary has been featured in the Financial Times, The Wall Street Journal, The Economist, Bloomberg, and South China Morning Post. Nicholas is a 2021-2023 Public Intellectuals Program Fellow at the National Committee on U.S.-China Relations and has testified before the U.S.-China Economic and Security Review Commission on multiple occasions.
Nicholas holds a B.A. in Political Science and International Studies from the University of Arizona and a Master’s degree in International Relations and Economics from the Johns Hopkins University School of Advanced International Studies (SAIS). He is a CFA charterholder and a member of the CFA Institute.
Expanded state control of the economy may lead to unsatisfactory investor outcomes.
This is indeed why the market has sold off. The question for the value investor is at what point are the risks of expanded state control "priced in" to securities? Or should investors assume there is no suitable price for that risk? It is a vital question. Consider if the historical average price-earnings ratio of U.S. stocks is 15 while these Chinese stocks now have a 5 p-e. If the expanded state control reduces potential return on equity, the question is by how much? Let's say you assume that Chinese stocks should trade at a 1/3rd or 33% discount to U.S. ones because of Xi's recent behavior and expanded state control. That would mean a 10 p-e or a 100% gain from here when the dust settles. (Of course, this is just a rough calculation as stocks could get to that 10 p-e by the "e" part falling instead of the "p" rising. But even if you assume half of each, a 50% gain.) By contrast, if you think, that's it, the end of capitalism in China altogether--no price is worth paying.
Expanded state control of the economy may lead to unsatisfactory investor outcomes.
This is indeed why the market has sold off. The question for the value investor is at what point are the risks of expanded state control "priced in" to securities? Or should investors assume there is no suitable price for that risk? It is a vital question.
[snip]
By contrast, if you think, that's it, the end of capitalism in China altogether--no price is worth paying.
This is indeed a vital question for value investors. Value investors must be cautious to avoid "falling knives." Regardless of price, I don't want to deal with an increasingly authoritarian government which can capriciously decimate equities (e.g., tech, education) in an instant ¹. I don't believe Chinese-style capitalism will end, but government intervention in the markets may increase now that Xi has consolidated power.
¹ I do own VWILX. Chinese equities comprised 14.6% of assets as of 08/31/2022.
As some of you know, there was an extensive special section in The Economist last week providing an in-depth analysis of the China situation generally, including some possible investment cautions and insights.
In addition to the threat of authoritarian control and Xi intervening in company management whenever he feels like it ( as he has already), there is the issue of manipulation of numbers. I don't see how you can calculate a "P/E" when the "E" can be manipulated by the government
If you must invest I would try to buy a fund that can buy actual equities not the ADRs
A new bifurcated world, like back during the old Cold War. NATO and allies vs. both Putin-soviet-style junk, plus tacit or active support from communist China, and India--- which is buying materials from those two pariahs. ...Then you have the Orbans and Bolsinaro Trumpster-types. I have even noticed a religious connection: ultra-conservative wingnut Catholics who reject the current pope as somehow an anti-pope or anti-Christ, together with right-wing nutso evangelicals who are more than willing to swallow and spread conspiracy theories and assist with insurgent-type behavior.
Like Lewis B pointed out, what is the risk premium in order invest in China ? If the earnings are being manipulated by the state, there is no true reported value. Majority of Chinese citizens invest in bonds and insurance products, not so much their own stock market comparing to that of US. This reminds me of the tulips mania.
"And sometimes, autocracy risks can even render an investment’s value almost worthless overnight. Last year, the profitability of Chinese tutoring firms was placed at risk by a government order forcing all such companies to register as nonprofit organizations. Since January 2021, ADRs of TAL Education Group (TAL) have lost 93.9% of their value, while those of New Oriental Education & Technology Group (EDU) are down 86.7%."
“'Increasingly, what you’ve been seeing over time is that the government of China is not hesitant to stick its hands in public companies’ positions,' says Daniel Sotiroff, senior manager research analyst at Morningstar. Sotiroff also points to the failed IPO of Ant Group—Jack Ma’s financial-technology company owned partially by Alibaba (BABA), set to be the largest IPO in history—as an example of government regulations affecting the markets. Just hours before the planned debut, Chinese regulators suspended the offering on the basis of new regulations."
“'China has been the fastest-growing economy for years, by a long shot,' Sotiroff says. Since 1992, China’s gross domestic product has risen from $426.9 billion to $17.7 trillion—that’s growth of over 4,000%. 'And for a while, the stock market did grow, but it never really turned into great performance compared to other markets.'”
And now for a potential China "bull case"... The following excerpt is from the 'Points of Return' newsletter (John Authers) published today.
That leads to a final question: Why would anyone be bullish about China at present? Its problems are evident, and most international investors will justifiably hate the current political direction. Andy Rothman, investment strategist and veteran China-watcher at Matthews Asia, agrees that watching for progress on Covid Zero, and particularly for a pickup in vaccination rates, which have been falling, is most important. Providing the country can find a way out of lockdowns, he offers the following “bull case” for 2023:
China is likely to remain the only major economy engaged in serious easing, while much of the world is tightening.
Chinese households have been in savings mode since the start of the pandemic, with family bank account balances up 42% from the beginning of 2020.
Those funds should fuel a consumer rebound, and an A-share recovery, as domestic investors hold about 95% of that market.
There are good cases for both sides of this debate. That's why it's a blood in the streets moment. One question that arises in my mind: Is Chinese capitalism too big to fail? I think the country has come so far in its evolution it would be catastrophic for itself and the global economy to reverse all of it. It is not equivalent to the backwater Russia but a vital contributor to global trade, a manufacturer of almost everything. Yet the uncertainty is extraordinary. I think fortunes could be just as easily made as lost investing in the country going forward. The key will be figuring out what Xi wants, but bear in mind he is the same man who ran the country when investors liked China too. They were probably too optimistic when they liked Xi and maybe too pessimistic now. But one could see a scenario where the industry he likes and doesn't feel threatened by could get a boost and a lot of support. Solar power comes to mind.
For a value investor July of 2008 comes to mind. You are staring at two investments--Lehman Brothers and Bank of America. Which one goes bankrupt in September and which one is too big too fail? Doing the deep analysis can pay off. Of course, Bank of America got cheaper, bottoming in March of 2009, before it recovered. But I have to imagine, someone is going to get the China analysis right and profit handsomely off it.
And now for a potential China "bull case"... The following excerpt is from the 'Points of Return' newsletter (John Authers) published today.
That leads to a final question: Why would anyone be bullish about China at present? Its problems are evident, and most international investors will justifiably hate the current political direction. Andy Rothman, investment strategist and veteran China-watcher at Matthews Asia, agrees that watching for progress on Covid Zero, and particularly for a pickup in vaccination rates, which have been falling, is most important. Providing the country can find a way out of lockdowns, he offers the following “bull case” for 2023:
China is likely to remain the only major economy engaged in serious easing, while much of the world is tightening.
Chinese households have been in savings mode since the start of the pandemic, with family bank account balances up 42% from the beginning of 2020.
Those funds should fuel a consumer rebound, and an A-share recovery, as domestic investors hold about 95% of that market.
I've been following Andy since his days at CLSA. I'm a fan of his story telling. However, he's lost a lot of credability over the years. When have you EVER heard Andy NOT be BULLISH on China? There is optimism...and there is being biased or saying what you want to happen. Andy has become much more the latter.
Plus...he now works for Matthews, which has a vested interest in saying "China is a great asset class". Perhaps the combo of Andy being now at Matthews makes me more skeptical (plus, Matthews has had a mass exodus of portfolio management talent...yet Andy for some reason stays).
Andy has to change things up every once in awhile or he sounds like a biased broken record.
@ProtonAnalyst33 If you're referring to Andrew Foster, he is not at Matthews but Seafarer. Also, none of the posts or linked articles here are by Foster. The first is by Nicholas Borst at Seafarer. The second is a Morningstar article by Lauren Solberg and the third you're quoting is a 'Points of Return' newsletter by John Authers at Bloomberg.
@ProtonAnalyst33 If you're referring to Andrew Foster, he is not at Matthews but Seafarer. Also, none of the posts or linked articles here are by Foster. The first is by Nicholas Borst at Seafarer. The second is a Morningstar article by Lauren Solberg and the third you're quoting is a 'Points of Return' newsletter by John Authers at Bloomberg.
I'm referring to Andy Rothamn, who is at Matthews. Observant1 referred to him in his post above, e.g. China bull case.
Bumping this discussion back up. I’m curious if anyone has added to their investments in either China or in EM? If so what funds are you investing in? Back in 2020 I had a large position in MIOPX, one of Kristian Heugh’s funds. But the fund sold off 55% last year. Luckily I sold out in time. So far this year I have purchased Vanguard international core stock fund which is managed by Wellington and has a 9% China stake… good conservative fund that has outperformed since inception. Curious what you are doing?
I’m also intrigued by Dodge and Cox Emerging stock fund. It’s a young fund but has done well in its short life. It has 25% allocation to China and I trust the D&C process
Stock selection for Dodge & Cox Emerging Markets Stock (DODEX) relies on quantitative research but the firm's other funds mostly depend on fundamental analysis. DODEX also has far more holdings than other Dodge & Cox equity funds. Not saying this is good or bad, just something to be aware of. Link
Comments
Glad to have that available, LB. Thank you. Foster writes with precision, even eloquence, if I may say so. I was in his fund several years ago and left it after disappointing returns. Surely, it was not all his fault. He is as sharp and smart as can be.
@LewisBraham: M* offers an AI analysis of ECNS, as one might expect. A fund that was a top-quintile performer in 2021 while gaining 2% and then losing 42% in 2022 might make anyone queasy.
He and the Chinese Communist Party will interfere in the economy to facilitate the party's political goals. Needless to say, return on equity will not be prioritized.
Expanded state control of the economy may lead to unsatisfactory investor outcomes.
This is indeed a vital question for value investors.
Value investors must be cautious to avoid "falling knives."
Regardless of price, I don't want to deal with an increasingly authoritarian government
which can capriciously decimate equities (e.g., tech, education) in an instant ¹.
I don't believe Chinese-style capitalism will end, but government intervention
in the markets may increase now that Xi has consolidated power.
¹ I do own VWILX. Chinese equities comprised 14.6% of assets as of 08/31/2022.
If you must invest I would try to buy a fund that can buy actual equities not the ADRs
https://morningstar.com/articles/1121936/big-china-stock-bets-continue-to-hit-emerging-markets-funds
"And sometimes, autocracy risks can even render an investment’s value almost worthless overnight. Last year, the profitability of Chinese tutoring firms was placed at risk by a government order forcing all such companies to register as nonprofit organizations. Since January 2021, ADRs of TAL Education Group (TAL) have lost 93.9% of their value, while those of New Oriental Education & Technology Group (EDU) are down 86.7%."
“'Increasingly, what you’ve been seeing over time is that the government of China is not hesitant to stick its hands in public companies’ positions,' says Daniel Sotiroff, senior manager research analyst at Morningstar. Sotiroff also points to the failed IPO of Ant Group—Jack Ma’s financial-technology company owned partially by Alibaba (BABA), set to be the largest IPO in history—as an example of government regulations affecting the markets. Just hours before the planned debut, Chinese regulators suspended the offering on the basis of new regulations."
“'China has been the fastest-growing economy for years, by a long shot,' Sotiroff says. Since 1992, China’s gross domestic product has risen from $426.9 billion to $17.7 trillion—that’s growth of over 4,000%. 'And for a while, the stock market did grow, but it never really turned into great performance compared to other markets.'”
Link
The following excerpt is from the 'Points of Return' newsletter (John Authers) published today.
That leads to a final question: Why would anyone be bullish about China at present? Its problems are evident, and most international investors will justifiably hate the current political direction. Andy Rothman, investment strategist and veteran China-watcher at Matthews Asia, agrees that watching for progress on Covid Zero, and particularly for a pickup in vaccination rates, which have been falling, is most important. Providing the country can find a way out of lockdowns, he offers the following “bull case” for 2023:
China is likely to remain the only major economy engaged in serious easing, while much of the world is tightening.
Chinese households have been in savings mode since the start of the pandemic, with family bank account balances up 42% from the beginning of 2020.
Those funds should fuel a consumer rebound, and an A-share recovery, as domestic investors hold about 95% of that market.
For a value investor July of 2008 comes to mind. You are staring at two investments--Lehman Brothers and Bank of America. Which one goes bankrupt in September and which one is too big too fail? Doing the deep analysis can pay off. Of course, Bank of America got cheaper, bottoming in March of 2009, before it recovered. But I have to imagine, someone is going to get the China analysis right and profit handsomely off it.
There are now EM funds created that exclude China stocks. It would be interesting to track their performance relative to VWO.
Plus...he now works for Matthews, which has a vested interest in saying "China is a great asset class". Perhaps the combo of Andy being now at Matthews makes me more skeptical (plus, Matthews has had a mass exodus of portfolio management talent...yet Andy for some reason stays).
Andy has to change things up every once in awhile or he sounds like a biased broken record.
If you're referring to Andrew Foster, he is not at Matthews but Seafarer. Also, none of the posts or linked articles here are by Foster. The first is by Nicholas Borst at Seafarer. The second is a Morningstar article by Lauren Solberg and the third you're quoting is a 'Points of Return' newsletter by John Authers at Bloomberg.
but the firm's other funds mostly depend on fundamental analysis.
DODEX also has far more holdings than other Dodge & Cox equity funds.
Not saying this is good or bad, just something to be aware of.
Link