“The biggest change since summer is more of a macro change. We are seeing that inflation will likely pick up gradually across the world in the coming months and quarters. It comes mostly from a recovery in commodity prices, which should provide some extra growth points globally,” he told FSA.
Gaud is a member of the team managing China and emerging market-related equity funds.
He expects commodity prices to slowly grow after a reasonable increase in demand and efforts to curb the supply. “We have already passed the deflation risk and now we think inflation is coming back gradually.
“It doesn’t need much of an increase in commodity prices to generate positive returns in a number of sectors. That’s why we think over the coming 6-12 months a decent case can be made to take exposure in the materials and commodity sectors.”
He believes China’s new economy is the long-term trend. Cyclical stocks offer some space for rebound as they are likely to have slight improvement in business lines, marginal upside in earnings and better cash flows.
China equities underperformed the rest of emerging markets for the past year after the domestic stockmarket crash last summer. MSCI China returned 1.65% for the year ended 19 October while MSCI Emerging Markets gained 8.18% during the same period.
Valuations, particularly H-shares (Hong Kong listed Chinese companies), which have a price-to-earnings ratio at 8-9 times, offer “significant discounts” compared to most stock markets globally, he added. “There is clearly room for catch-up.”
The firm has been adding China exposure in the past few months to sectors such as autos, gaming stocks and oil companies, which have already seen some quick rallies, he said. “There has been a massive underweight, and when those stocks started to move up a bit, people are forced to catch up and buy them.”
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The performance of Edmond de Rothschild EDRF China Fund and Global Emerging Fund with their respective benchmark indices over a three-year horizon, according to data from FE Analytics.
The performance of MSCI China, MSCI Emerging Markets Asia and MSCI Emerging Markets Index for the past 12 months, according to data from FE Analytics.
