The general consensus is that the long-term China and India story remains intact, despite the recent emerging market sell-off and China’s trade tensions with the US.
But one manager looking to avoid the two countries, and entirely so in the case of India, is Jupiter’s head of Asian income strategy and Asia Pacific Income fund manager, Jason Pidcock (pictured).
On China, Pidcock is cautious due to the political risk in the country and issues around its judiciary system, which he believes are reasons enough not to invest directly. Especially when the size of its economy means it is so easy to play the market indirectly.
While he recognises that China ‘has some great companies’, Pidcock believes there are more large stocks with strong balance sheets and high liquidity elsewhere in the region. He said: ‘Liquidity is important, it means if you do change your mind you can get out quickly.’
The China consumption growth story is a favourite with managers in the region, but Pidcock sees better value in playing that through companies in other countries that will benefit from the growth in visiting Chinese tourists and their increasing ability to spend money on entertainment.
The number of Chinese tourists has skyrocketed 1,380% since the turn of the millennium, with 145 million overseas trips made by Chinese residents just last year.
‘We invest in a couple of airports in Sydney and Malaysia, they are benefiting from greater aviation traffic and more passengers arriving as tourists,’ Pidcock said. ‘Not just from China, from other countries too, but China is a key new market. Casinos in Australia, Singapore and Macau, a lot of their clientele are from China.’
His fund has a 7.7% weighting to China, significantly below the weighting in the MSCI Asia Pacific ex Japan benchmark.
It also has a zero weighting to India, and Pidcock sees many problems with the country, most notably its currency, twin deficits and vulnerability to a higher oil price as a big net importer of oil.
India’s financial sector and its well-documented corruption issues is also a big turn off at the moment for Pidcock. Other recent issues in the sector, including the poorly performing rupee and the financial stability of various institutions, evidenced by the near-collapse of non-bank lender IL&FS, which triggered a sell-off in the shadow banking sector, are also cause for concern.
The knock-on impact on other companies is also evident in the Indian stock market.
He said: ‘Any difficulties in the banking sector in an emerging market tends to cause worries for the whole stock market, and in the last few weeks, a number of the banks in India have seen their share prices hit hard for various reasons. Other stocks’ share prices have slid on the back of that.’
Pidcock also views the weak rupee as a problem, with the currency down 26% against the US dollar since 2014, and adds: ‘There’s no point investing in equities if you think you’re going to get a 5-10% return, if you can lose 15-20% on the currency.’
Another issue he highlights is the capital gains tax in India, whereby investors have to pay 15% of their profit as tax if they buy a stock and sell it within a year. This falls to 10% if the stock has been owned for over a year.
He said: ‘Even with the tax levels at those rates, that’s a disincentive to invest in India. And when a government that is running a budget deficit has a tax in place, there is always a risk it might increase that tax level, and they can do so retrospectively, so that’s quite a disincentive. Things would have to change quite a bit for me to find the Indian market appealing.’
One country Pidcock is interested in at the moment is Australia, which currently makes up just over a quarter of his portfolio.
He highlights the country’s AAA sovereign credit rating, with its debt to GDP ratio hovering around 40%, and the fact it has not had a recession in 26 years, which he puts down to its ‘very strong demographics’ and population growth of 1.5% a year.
One of his top 10 holdings is Australian finance group Macquarie.
While not keen to highlight particular stocks, Pidcock says on Australian equities: ‘We get high yields from our companies, they’ve got good corporate governance, and they take care of minority shareholders very well.’
The Jupiter Asia Pacific Income fund has returned 0.8% over one year, compared to a sector average of 0.6%. Over three years it is up 47.2% versus 62.4% for the peer group, but it offers one of the sector’s better risk/return profiles, ranking 20th out of 183 peer funds for standard deviation.