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Wells Fargo: China concerns `overstated’

The market has priced in the possibility that China will have an economic hard landing, but Wells Fargo Asset Management senior portfolio manager Anthony Cragg said the worries are overstated and China is undervalued.

“We believe those concerns are hugely overstated. People have been banging on about a hard landing for 5-6 years. This hard landing is not happening and I don’t believe it will happen.

“The market is valued as if it’s about to happen, so we have seen incredibly low allocations to China by investors. While there are less and less people banging that doomsday drum, still a few out there are predicting the sky will fall,” Cragg, co-manager of the Wells Fargo (Lux) Worldwide Emerging Market Equity Income Fund, told FSA.

China is the second biggest economy in the world and is extremely undervalued, he said, suggesting that investors are apparently discovering that. The AUM of his firm’s EM funds were below $1.1bn at the beginning of the year. Currently the figure is $1.65bn.

“[Capital is] now returning to Asia, not just China generally. When the market is that big, if you miss it, you have a problem.”

Potential risks

Cragg said he believes that most emerging markets, including China, likely will continue to be affected by two extrinsic issues. One is Brexit and what it will mean primarily for Europe and residually for everyone else.

“[Brexit] already has affected currencies. Investors became more cautious about investing outside of the US dollar or their home currency.”

The other possible event would be the timing and amount of the next interest-rate increase from the US Federal Reserve, which yesterday elected to leave the interest rate unchanged. Given global risks this year, it could mean only one rate hike in 2016.

“Because several emerging countries and companies have outstanding debt denominated in US dollars, the Fed’s actions often affect sentiment on emerging markets. We hope to see more clarity on these macroeconomic issues in the second half of the year.” 

Regarding the outlook on the renminbi, he said the currency has actually outperformed for a long period when compared to other emerging market currencies. 

“While the rand, the rupee, the rupiah and the peso were all collapsing against the dollar, the RMB held its own against the dollar for a long time. We’re seeing now a little bit of weakness in the RMB, but it’s really just playing catch up with what other global currencies have already done.

“At the beginning of the year, a lot of people were worried about a sudden, dramatic collapse in the RMB. That hasn’t happened and we don’t think it will. The currency will continue to weaken, but it will do so in a gradual, fairly orderly way. I don’t think it will have a negative impact on the markets,” he said.

Within China, the firm continues to like those sectors that are supported by government policies, such as healthcare and the environmental sector and alternative energy sectors, which includes clean power, clean technologies and clean water, he said.



The Wells Fargo (Lux) Worldwide Emerging Markets Equity Income Fund versus its benchmark — the MSCI Emerging Market Index — over the last three years, according to FE Analytics.


Part of the Mark Allen Group.