A reorientation of China’s economy to focus on technology and services companies has made money manager Gary Greenberg bearish on Chinese consumer-discretionary stocks.Qilai Shen/Bloomberg
A money manager who sold part of his Chinese equity portfolio just before a $5-trillion (U.S.) meltdown this year has returned to the market, buying shares of technology and services companies.
Gary Greenberg, who manages $1.7-billion of emerging-market stocks at Hermes Investment Management, bought New York-traded e-commerce company Alibaba Group Holding Ltd. and Baidu Inc., operator of an Internet search engine, "in the past couple of months." Speaking at an interview in London, the money manager said he also favours Kweichow Moutai Co., which makes a premium liquor brand, and insurer AIA Group. Mr. Greenberg's losses in 2015 were smaller than 61 per cent of peers for the larger of his two funds.
The strategy provides a snapshot into a broader trend among investors seizing on a shift in China toward greater reliance on consumption and services industries as engines for economic growth as the contribution of heavy industry wanes. The ChiNext index, used by local traders as a proxy for new-economy companies, surged 31 per cent in the past two months, six times more than the Shanghai composite index.
"The economy is going through a transformation," Mr. Greenberg said. "We see two Chinas: An industrial China growing at about 2 per cent and a service economy, growing at about 12.5. And each one accounts for about half of the total gross domestic product."
Mr. Greenberg plans to maintain his overweight stance on China relative to the benchmark MSCI emerging-markets index even if the index provider decides to add Alibaba and Baidu to its China index during a review as soon as this month.
Slower growth
His main bet is that demand for services and goods among China's 1.4 billion people will support shares of companies such as Alibaba. Economic expansion is projected to slow below 7 per cent over the next two years, the weakest levels since 1990, when China faced international sanctions in the wake of the 1989 Tiananmen Square massacre. Mr. Greenberg has offered returns in the top-15 percentile in the past three years, according to data compiled by Bloomberg.
There are risks to the approach. Franklin Templeton's Mark Mobius said last month that while he was convinced the push into technology will produce more sustainable expansion in China, stock valuations already reflect a successful transition. Shares on the ChiNext are more than three times pricier than counterparts on the Shanghai composite.
Mr. Greenberg himself is wary of the prospect the state-owned enterprises that propped up the Chinese market since June will sell off their holdings in the next year or two.
'Attractively priced'
Hermes Investment Management reduced its China position to underweight levels in May and June for the first time since 2012, meaning it held a smaller proportion of stocks in the country than the emerging-markets benchmark. Growth prospects of technology and services companies relative to corporate valuations inspired him to reverse this approach.
Profits at Alibaba and Baidu are set to grow more than 20 per cent next year and surpass 30 per cent in 2017, according to estimates compiled by Bloomberg. Mr. Greenberg also boosted holdings in Gree Electric Appliances Inc., an air-conditioner manufacturer that trades at a multiple of 6.85 times projected 12-month earnings, a 47-per-cent discount to the Shanghai composite index.
"A lot of stocks are attractively priced," he said. "We underestimate their potential."