Barings' Deng adds to Chinese banks in £2bn fund

Barings' Agnes Deng is increasing exposure to Chinese banks within the £2.5bn Hong Kong China fund as valuations fall to levels last seen during the banking crisis.

Although the manager remains underweight financials, she has been topping up banks during the recent market volatility, with exposure up 5%.

She said a lot of the negative news has been priced in to the shares, making them look attractive.

"Valuations are cheap, close to what we saw at the bottom of 2008, but banks are delivering earnings growth, and generating 20% to shareholders."

Deng, who has managed the fund since 2007, said she is still cautious with regards to some of the banks' ‘bad' loan books, but has been encouraged by recent interim results.

"We are not going to move overweight overnight on banks. I am cautious about the loans but the recent interim results said the overall quality of the loans is coming back. I think the market is too worried about the loans."

Deng's fund is the second largest in the IMA China sector, but performance has lagged peers recently.

It has returned 30% over the past three years compared to the sector average of 38% (to 23 August, according to Morningstar).

Other sectors the fund is overweight include information technology, consumer discretionary and industrials.

Deng said she is playing the demand for smartphones, which is on the increase from Chinese consumers, through her technology stocks.

"3G data usage in China has seen a pick up in demand through smartphones as they become more affordable to the Chinese consumer and these companies continue to deliver above expectations," she said.

She is avoiding companies involved in the manufacturing of PCs but holds internet companies due to the low but increasing penetration rate in China.

In the consumer discretionary space she is favouring department stores and luxury brands to play the rising middle class.

She holds Brilliance China Automotive which has a joint venture to sell BMW cars.
"This has delivered more than 68% revenue growth in the first half of the year on the back of demand for luxury goods," said Deng.

The fund is underweight financials, materials, telecoms and utilities.

"Utilities' valuations are not cheap and earnings growth is low and although we hold China Mobile we are underweight as it is losing market share to China Unicorn and China Telecom," she said.