China’s been hogging the headlines recently, for all the wrong reasons. Tech has been getting a good kicking (my Prosus suggestion is looking badly timed) and the CCP has decided that educational tutoring should be nonprofit making. Who’d have thought that communists could come up with that idea?
These developments have come along at a propitious moment – the latest five-year plan is out and I think it behoves Western capitalists to actually take some notice of what the CCP would like to happen in the next five years. I’ve mentioned blogger Lillian Li before but her substack has an excellent summary HERE. She makes the not unreasonable suggestion that investors might want to focus their future plans on those sectors where the CCP would like to encourage investment. Helpfully she has a list, which is as follows:New Generation Artificial Intelligence
- Quantum Information
- Integrated Circuits (or Semiconductors)
- Neuroscience and Brain-Inspired Research
- Genetics and Biotechnology
- Clinical Medicine & Health
- New energy
- Autonomous vehicles
- High-end medical devices
- Innovative medicines
- Cloud computing
- Big data
- Internet of things
- Industrial internet
- Virtual and augmented reality
So, just make sure you’re on the right side of the Five Year Plan and not in the ‘wrong’ sectors where your investment future could vanish in a single diktat.
Talking of diktats fund analysts at Numis have been crunching the numbers on the recent rout in tech stocks and the impact on investment companies. The good news is that all of the China-focused funds are underweight the China tech giants, given the weighting of over 30% in the MSCI China on 30 June. However, exposures remain large at c.20% of the portfolio. In particular, they draw attention to the “ approach of Stewart Investors, manager of Pacific Assets, means that it has no exposure to the tech-giants, which have not typically met the manager’s definition of quality. Perhaps the biggest surprise is the low exposure of Pacific Horizon, managed by Baillie Gifford, to these stocks given its explicit focus on growth. However, over the last 18 months the portfolio underwent a significant rotation away from Chinese technology companies in favour of more cyclical companies, including Materials companies, and exposure to India was increased”. The first chart below outlines big China Tech exposures for leading investment companies.
I’d agree with Numis and draw your attention to the JPMorgan China Growth & Income fund which “stands out on 7% discount with its peers trading on premiums, particularly given its exceptional track record through a growth approach in recent years”.
This Chinese sell off has predictably had a big knock-on impact on emerging market funds, most of which tend to have around 20 to 50% exposure to China and especially China Big Tech. The sell off should have made these EM funds really cheap but that’s not quite the message of a considered research note from EM specialists Ashmore. In a paper entitled Measuring EM stocks’ undervaluation By Gustavo Medeiros they look at key valuation measures such as the Buffett model which is a ratio of stock market capitalisation to nominal gross domestic product (GDP) which according to Buffett is “probably the best single measure of where valuations stand at any given moment”. For comparison the US markets, via the Wilshire 5000, is now at a peak of 235%, which is the highest in 50 years -or put another way market participants are trading US companies at close to 2.5x the size of the US economy. By comparison aggregate EM is at 124% of GDP in Q1 2021 which is lower but not a raging buy. That hides big regional variations though – half of the Big Eight have market caps to GDP well below 100% i.e Brazil at 56% and Russia 51% with Taiwan and India the most expensive.
What about a more traditional measure such as the PE ratio – For EM in aggregate, price to earnings valuations stands at the upper part of the last 15 years range at 12.7 times earnings, so not a bargain but not expensive either. But if we switch measures and look at 12 month blended forward P/E relative to the S&P 500 EM equities trade at the largest discount in terms of since 2005. This also contains some big outliers, notably Brazil which is close to 8 x earnings. 1.6 standard deviations below the mean while Russia is also cheap, especially given the earnings rebound. As for China, P/Es rose from 11.0x in September 2019 to 16.8x in January 2021 before declining to 12.9x on the 27 July.
The Ashmore reports concludes. rather optimistically, that although on an absolute basis, “EM stocks do not screen as ‘cheap’ vis-à-vis recent history largely due to the recovery stage of the economic cycle, where valuations tend to lead the positive revisions to growth and earnings.”. I’d be slightly more cautious than that.
Last but by no means least the always excellent Dylan Grice of Calderwood Capital Research has a cracking interview in this month’s edition of his equally excellent Popular Delusions about IRAN.
This is definitely frontier of the frontier stuff and involves talking to Maciej Wojtal, founder of dedicated Iranian equity manager Amtelon Capital – www.amteloncapital..com. Now I have talked about Iran before in my FT column, many, many moons ago HERE but not unnaturally I’ve tended to stay away from this subject for all the very obvious reasons. Anyway, the Popular Delusions interview is absolutely fascinating and as you’d expect the local stockmarket is dirt cheap. Here are some highlights in terms of numbers :
- Iran itself is a potentially big economy boasting 84 million people, with decent population growth. “The population has grown by about 1.3% annualized over the last 30 years and is expected to grow by around 1% per year for the next twenty”
- Local citizens don’t have much money to invest in stocks as “right now the average salary is probably around $200”
- Back in 2016 had a robust stockmarket worth $100bn, with roughly $100m daily liquidity and 600 stocks across 50 sectors
- It’s local stockmarket is driven by retail demand. More than 90% of daily flows are coming from retail
- Local stocks have done very well over the last decade. “…since the end of 2009, just coming off the lows of the GFC, the annual return from the local stock market in USD terms has been roughly the same as that of the S&P500. Something like 14%”
- The local market is cheap. The “Long-term average P/E of the Iranian market is probably around six to seven times” whereas at the moment it is just under nine times earnings. The average forward multiple for the top thirty stocks iks 4.7x based on consensus numbers
- Apparently many locally listed companies “are actually dollar assets that just happen to be listed in Tehran”
- Foreign investment in Iran is tiny. “All the foreign money invested was less than half a percent of GDP, and it hasn’t changed since 2016”
- Iran’s economy could be a great deal larger – Iranian GDP is around $250bn versus $800 bn for Turkey, a country of similar size and no oil and gas
- Most Iranians are not very ideological, especially as a “majority of the population is less than 30 years old. They don’t remember the revolution”.