A 30-year veteran of investing in emerging markets says that “everything is coming together” for a rally in China’s equity market after a week that saw shares slide to fresh 2023 lows.
(Bloomberg) — A 30-year veteran of investing in emerging markets says that “everything is coming together” for a rally in China’s equity market after a week that saw shares slide to fresh 2023 lows.
John Malloy, who helps manage about $10 billion in equities as co-head of emerging and frontier markets at Redwheel, has China as his largest overweight and favors companies including Alibaba, Kuaishou Technology and Baidu. He’s holding firm even as mainland stocks and Hong Kong-listed technology shares see their worst August in eight years.
“Valuations are cheap, growth is starting to bottom out and positioning is also favorable,” Malloy said in an interview in Sao Paulo last week. “It’s hard to determine how much downside there is, but the risk-reward is incredibly favorable for emerging-market stocks right now.”
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Stocks will rebound, he says, pointing to “good” corporate results and the fact the government is focusing more on pro-growth measures and less on regulation.
While the fund was “arguably” early on the trade — Redwheel started to favor shares near the end of last year — its positions have about 50% upside in terms of price targets, said Malloy, who began investing in emerging markets back in 1993 at Baring Asset Management.
The $1.6 billion Redwheel Global Emerging Markets Fund has beaten 60% of its peers this year with a 4% advance, according to data compiled by Bloomberg. As of late July, the fund had a 37% exposure to China, according to filings. Malloy also helps manage an investment vehicle in the Caymans for offshore investors and other funds that require less disclosure.
The MSCI China Index traded at a 12-month forward earnings multiple of 9.7 times as of Friday, versus a five-year average of 12.1. The rout in Chinese equities has seen an index of the nation’s shares listed in Hong Kong become one of the world’s worst performers this month among more than 90 equity gauges tracked by Bloomberg.
Meanwhile, global funds have been selling onshore Chinese stocks, offloading almost $11 billion in a 13-day run of withdrawals through last Wednesday, the longest streak since Bloomberg began tracking the data in 2016.
Redwheel, formerly known as RWC Partners Ltd., is also overweight on Brazil, owning stocks including railway company Rumo SA and Localiza Rent a Car SA.
The South American nation offers “great assets” and companies that play key roles in the renewable supply chain, protecting biodiversity and providing essential services, Ting Ang, a New York-based portfolio manager at Redwheel, said in the same interview.
Other pockets of opportunity across developing nations include Saudi Arabia — Redwheel likes Aramco and the Saudi National Bank —, and Abu Dhabi and Dubai, where it sees tailwinds for property developers. It’s underweight India and Mexico.
The firm is also bullish on Brazilian mining giant Vale SA, whose shares have lost almost a third of their value since the beginning of the year. The miner recently sold a 13% stake in its base metals unit for $3.4 billion to Saudi sovereign wealth vehicle, the Public Investment Fund, Saudi Arabian Mining Co. and Engine No. 1.
“We’re gaining more conviction on the trade,” Malloy said. “When you look at the potential value of the base-metals division, its Ebitda could be 70% higher — considering current prices. We could be building that position up.”
–With assistance from Shikhar Balwani and Srinivasan Sivabalan.
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