Emerging market equities are dominated by SOEs. They make up 30% of the MSCI Emerging Market Index, and 70% of the MSCI China Index, Kathryn Koch, global head of client portfolio management at the firm, told FSA during her recent trip in Hong Kong.
“The problem with SOEs is that profit is not a goal and they are generally working in the interest of the sovereign, not always minority shareholders. We are focusing on those companies who are always prioritising the interest of minority shareholders. That leads us to be underweight SOEs in emerging markets and also China specifically,” she said.
Regarding her allocation strategies in China, she said she would avoid allocating capital to any old economy companies, where the part of economy obviously slowing the most — manufacturing and industrials, for example.
The firm allocates capital to the new-economy oriented companies, which are mainly small- and mid-cap based companies and they are connected to the key sectors, such as consumer, ecommerce and travel, she said.
“We have nothing to say about how much China is going to grow, but we are constructive on the development of individual companies.
“There is big growth in China tourism, green technology, alternative energy and resources. Consumer discretionary, travel and leisure, alternative energy would also be important examples.”
China’s transition clear
China’s economic transition from investment-led to domestic consumption-led is a well-known theme, she said.
“We are clear about the five-year plan. China has slowed, but the world’s second largest economy can’t grow at 10% every year. We certainly see [the transition] through the lens of the domestic companies. It has to take a while.
“If you want people to spend more money, for example, you have to have a properly operated safety net, and it takes a while to build.
“There is a transition happening, the consumer is becoming slowly a bigger part of the economy, but we expect it should take a long time and expect it [consumption-led economy] to be volatile, and there will be quarters and years working better and some working worse.”
The Goldman Sachs China Opportunity Equity Porfolio fund has been mostly in line with the MSCI China Index over the past three years, according to FE Analytics.