View the article online at http://citywire.co.uk/money/article/a631712
China: 'people will wonder why on earth' they invested
China's 10-year growth boom is coming to an end, Newton Global Higher Income manager James Harries warns.
This view has led him to reduce his equity exposure to the region, and hedge some of his Australian and Canadian dollar, South African rand, and Brazilian real exposure back into the US dollar over recent months. The Newton Global Higher Income fund features in Citywire Selection, our guide to the best investment ideas.
‘We remain sceptical on companies, sectors and economies dependent on China because we think the 10-year boom is coming to an end,' he said. 'China has not had a down cycle for 10 years, and people have become used to dramatic growth numbers. It has had a very substantial boom, so at some point it will have some kind of bust and we think that is now unfolding.
‘While it has had a small bounce we think the long-term trend is down, and at some point we think people will wonder why on earth they put any money there at all.’
China watchers have a busy week ahead of them, as Thursday will see the opening of the 18th congress of the nation's Communist Party, the first stage of a process that will usher in a new generation of unelected leaders.
Prepare for volatility
Another key theme for Harries remains how the huge global deleveraging phase is leading to shorter and more volatile business cycles. He also said the combination of a difficult economic backdrop with ‘pretty poor starting valuations for all asset classes means that equities do not look good on a cyclically adjusted basis’.
He remains wary of the banking sector, which he thinks has a long way to go before it is sufficiently capitalised, and the sector remains a key underweight at 5% under the benchmark.
The £3 billion fund retained a significant 8% overweight to telecoms at the end of September with healthcare, consumer goods and utilities weightings all higher than the benchmark.
‘We remain positive on areas related to data growth, such as smartphones and handsets, and are also optimistic on healthcare. It is exciting how pharma firms have begun to pick up and produce some innovation for the first time in a long time. We had not factored that into the sector [previously].'
Harries is also positive on consumer staples, another key overweight, which he describes as an ‘island of stability against a difficult backdrop’.
Looking to the US
Owing mainly to his bearish China view, exposure to emerging markets and Asia in particular has been gradually reduced, while the US weighting has been gradually built up, to 36%, albeit still more than 14% below the benchmark.
‘The US economy looks well placed. It has cheap housing, in stark contrast to our own, and cheap energy due to the shale gas revolution. It also has a lot of slack in the labour market and real wages have gone nowhere for a decade, which gives the economy a degree of competitiveness.’
His European exposure remains concentrated in core Europe, particularly Switzerland, Germany, the UK and Norway, and there is no exposure to the peripheral countries. ‘If there is a default-style event, or the imposition of a fiscal framework to go alongside the monetary framework, we should probably change that view but it has not happened yet.’
Over five years to the end of September the fund has returned 36.5% compared with a 16.53% rise in its benchmark MSCI World index.
Citywire Selection verdict
James Harries is one of the best readers of the macro backdrop and remains in bearish mode. He is particularly wary of the Chinese business cycle and global deleveraging, but this has not stopped him delivering strong returns over the past year and over all time periods since the fund was launched. He is heavily backing the US and its currency and those countries with financial clout such as Germany, Switzerland, Norway and Singapore.
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by Gavin Lumsden on Oct 21, 2016 at 17:18