Investors resist China bargains despite easing inflation fears

Asia fund managers have mixed views on the timing of buying opportunities in China despite a consensus view inflation has peaked, according to Standard & Poor’s.

Although China was one of the worst performing markets over the year, managers have been hesitant to pick up cheap stocks owing to lingering concerns over the short-term macro outlook, S&P research found.

S&P Capital IQ fund analyst John Monaghan said although the general view from managers is that inflation has now hit its peak, First State’s Martin Lau is a notable exception.

The co-manager of the £556m Greater China Growth and £785m Asia Pacific funds fears inflation could be structurally higher for years to come, depending on how much more money the government prints.

He is particularly wary of the property sector as well as cyclical companies linked to the country’s huge boom in infrastructure and construction.

As a result, his portfolios are cautiously positioned, with low exposure to banks, energy, and materials but with a sizeable overweight to consumer staples.

Generally managers were not fearful of a hard landing as growth slows, Monaghan said. “At the macro level, there was little talk of a hard landing in China.

“Most managers share the view the tightening cycle is over but that any significant loosening of monetary policy is unlikely in the short term as this would add to inflationary pressures.”

One key call for China investors over the last year has been whether to buy into banks. Managers typically avoided or underweighted the ‘big four’ state banks - Bank of China, ICBC, China Construction Bank, and Agricultural Bank of China - which proved to be successful for relative performance.

However, BlackRock’s Jing Ning, co-manager of the £361m China fund, maintained an overweight position to banks throughout 2011 as she was confident the risks of non-performing loans had been overstated. Cong Li at Mirae also sees value within the banks and added positions at the end of last year.

For Li, the stocks represent a good short-term opportunity although he does not expect them to outperform the market over the next two to three years. O

ther investors with a value tilt, including Fidelity’s Joseph Tse and Allan Liu, running the Asia Special Situations and South East Asia funds, have been making early moves back into the market with valuations at historic lows.

S&P’s Capital IQ research covered more than 80 funds investing in Asia Pacific and South East Asia during 2011.