With Chinese stock markets on a rollercoaster ride, investors naturally have questions for portfolio managers with holdings in China. Below are my thoughts about the current situation and how it affects our funds. (Note: It doesn’t.)
The big picture
The trading halts on January 4th and 7th this year were due to a newly introduced circuit breaker mechanism, which in my view was not necessary given there is already a +/- 10% limit on daily price changes for individual stocks. The timing of this policy, in my opinion, was terrible. (The circuit breaker mechanism has since been suspended by the country’s securities regulator.)
Beyond this, however, the Chinese economy is still, fundamentally, working through a painful adjustment period marked by slow growth. It seems clear to me that the impacts of this will not be limited to China, commodities and other emerging markets, but will affect developed markets as well – industrial sectors in particular.
In terms of the Chinese currency, I feel confident in my belief that the renminbi will continue its depreciation against the U.S. dollar for this year – a 10% to 15% decline wouldn’t surprise me. Other than companies carrying U.S.-dollar debts, I don’t view the depreciation as destructive for the Chinese economy. In fact, I believe it will actually help many sectors regain some of the competitiveness they lost in the past few years. While it’s unlikely that the Chinese currency depreciation of today will match what has happened to the Japanese yen since 2011, I believe that China will enjoy some level of positive effects from it – similar to those that a weakened yen had on corporations in Japan.
We invest in individual companies, not sectors, countries or regions. We believe that some sectors will see good growth opportunities thanks to certain secular trends, such as health care, financial services and consumer goods.
Our focus and our competencies lie in bottom-up, fundamental research rather than macro forecasting. Our job is to find a few dozen companies that meet our FORS criteria and invest in them at a time when prices are discounted for short-term reasons. This may be such a time for some companies.
What is FORS?
Our investment philosophy is based on the belief that owning businesses with these characteristics and buying them at reasonable valuations will deliver strong returns in the long term. We don’t fear short-term volatility – such as the type we are experiencing today – but instead take advantage of the stock-price rollercoaster by investing in high-quality companies at the discount prices this volatility can provide. I feel strongly that this is one of the key lessons investors should have learned from past experiences, most recently The Great Recession in 2007-2009.
Overall, China doesn’t dominate our portfolios. Trimark Emerging Markets Class has a 29% weighting in China, Trimark Global Fundamental Equity Fund 12%, Trimark International Companies Fund 19% and Trimark Fund 5% (as at December 31, 2015). Amid all the market noise, we remain focused on seeking out quality companies that are poised to grow – and we remain confident in the companies we hold in our portfolios.
If you have any questions, you can leave them in the comments area below.
Note: Jeff Feng is Head of Emerging Markets at Invesco Hong Kong Limited (IHKL). Invesco Canada has entered into a sub-advisory agreement with IHKL to manage certain Trimark funds.