Clean energy could grow into one of the biggest industries in China, according to Wells Fargo’s Anthony Cragg.
He believes investors are overly pessimistic about the slowing Chinese economy and there are still attractive opportunities in this fast-growing sector, as well as technology.
Cragg (pictured) is balancing these twin ‘new economy’ themes with ‘old economy’ plays, such as buying into out of favour financials in his Wells Fargo China Equity fund.
He said the country has the ‘world’s biggest problems environmentally’. This means there is potential to see the relatively fledgling clean energy sector become a significant portion of the stock market.
‘Environmental issues are taking centre stage in China and the government is absolutely committed to doing something about it,’ he said. ‘The most significant is the move from coal-generated power production to alternative energy, including nuclear, wind, solar and the efficient use of fuel over the next five to 10 years.’
Solar power output is rising by 20% a year and Cragg has been playing this through a holding in China Singyes Solar Technologies Holdings. ‘The company’s shares have outperformed because of strong government support of the solar industry and China Singyes’ ability to build plants quickly,’ he said.
‘We believe the company is well positioned to be a long-term beneficiary of the clean energy movement. Demand for solar in Europe declined rapidly when they took away the subsidies, but the demand is huge in China.’
Similarly, ecommerce demand is rising rapidly and he has holdings in online conglomerate Tencent and Sina Corp. Although both suffered pullbacks earlier in the year as social media stocks sold off globally, Cragg remains a long-term backer of the sector.
He expects the upcoming flotation of Alibaba in the US to reignite interest in the internet and said he will take part in the initial public offering if the valuation is ‘realistic’.
‘It is an extremely strong business that is dominant in Chinese ecommerce and it has such a massive footprint, it has been able to move into financial services and other areas,’ he said.
‘I can see us getting involved if it comes to market at a realistic valuation.
‘Valuations do matter. We saw the buyer’s strike earlier in the year after many investors got lulled into the belief that these stocks would be bid up infinitely.’
Indeed, the high valuations seen in technology and other growth parts of the market have prompted Cragg to balance the portfolio’s ‘value-type plays with more predictable earnings stream’.
While he is still wary of the property sector, he has been building exposure to financials. Agricultural Bank of China is his top holding, with a 5.54% weighting, and he has two other banks in his top 10.
‘We believe in the new economy but equally there is value in financials, which became too cheap,’ Cragg said.
Across the board, he expects increased capital efficiency to be a significant driver of gains, as companies are rerated.
‘It is all about capital efficiency in China at the moment. For years it’s been about growth, but now the focus is on profits and using capital wisely in a lower growth environment,’ he said.
As an example, he highlights the deal struck between the three largest telecoms – China Mobile, Unicom and China Telecom Corp – to jointly create a telecoms tower operating company ‘instead of going head to head in cut-throat competition’.
Over 12 months to the end of June, the Wells Fargo China Equity fund is up 17.34% compared to the MSCI China index’s 15.67% rise in dollar terms.
Over five years it is up 8.28% while the benchmark gained 4.97%.