Chinese equities look like a compelling investment case now that policymakers have stepped in, according to Duncan MacInnes, fund manager at Ruffer.
Labeled by some as ‘perma-bears’, the British boutique asset manager known for its emphasis on capital preservation, has turned bullish on a market that has been shunned by most foreign investors.
Indeed, Chinese equities have underperformed the S&P 500 index by 116% over the past five years as China’s economy has struggled to recover from lockdowns and the property market downturn.
However, when rate cuts and stimulus announcements were made in September, Chinese stocks surged as much as 35% on the hope of more support from the government.
MacInnes said “the most telling policy” was the lending facility designed to finance stock buybacks and ease margin loan requirements.
“The authorities have realised that to save China’s economy, they might have to save the stock market first,” he said.
“This is new and it isn’t about small tweaks. Critics might decry a centrally planned economy, but when the Party says it’s time to grow, things happen fast.”
“There is precedent: this is exactly what happened in the Chinese market in 2015 when at one point the Shanghai Shenzhen CSI 300 index rallied 150% thanks to official encouragement.”
’The best contrarian allocation nobody is making’
Given that many foreign asset managers have been launching Asia and emerging market ex-China funds, MacInnes suggested that China could be “the best contrarian allocation nobody is making”.
“For many people China is now ‘un-investible’, much like the yen in the early 2000s,” he said. “This is music to our ears as it suggests investors are taking a closed-minded approach – surely there is a price for everything? For example, China’s tech giants trade at about one third of the valuation of their US equivalents.”
In taking a contrarian view on Chinese tech stocks, MacInnes joins the ranks of billionaire money manager David Tepper and hedge fund manager Michael Burry, known for successfully shorting the US housing market.
Tepper, who made a call to ‘buy everything China’ in September, has added to his stake in Chinese e-commerce companies Pinduoduo and JD.com, while Burry has increased his bet on Alibaba Group, according to 13F regulatory filings.
MacInnes acknowledged the risks to China, but suggested it is offset by his portfolio’s exposure to oil, gold and options. Roughly 5% of his strategy’s portfolio is allocated to Chinese equities.
“The risks are well known: decoupling and strategic competition with the US (Trump’s tariffs), Xi’s potential plans for Taiwan and the exclusion of Chinese markets from global capital,” he said.
“But our comfort here is twofold. Firstly, if the bad outcomes materialise, we believe the rest of the Ruffer portfolio is well set. What do oil and gold do if Xi invades Taiwan? How do credit spreads, volatility and equity downside protections perform in that scenario?”
‘Sentiment is dire‘
MacInnes also argued that global investors are “long China anyway, but at much higher valuations”.
“Starbucks, Tesla, LVMH and Nvidia are all China plays,” he said. “Isn’t it better to get intentional exposure at much lower prices?”
Indeed, China is the second biggest market for US-listed firms Starbucks and Tesla and forms a key market for European luxury goods conglomerate LVMH.
MacInnes said: “In any case, we think the picture is rosier than it appears. China is enjoying earnings upgrades. Equity valuations are extremely low. Sentiment is dire.”
“We believe you make the most money when a situation goes from awful to merely bad, rather than when something goes from good to great.”
“To summarise the setup: an asset class some investors refuse to own, terrible sentiment, rock bottom valuations and now policymakers are trying to put a floor under the market and giving it some positive momentum.”
