Marshall Wace Financials Funds Buy Chinese Banks, Property Firms

Marshall Wace LLP, the London-based asset manager founded by Paul Marshall and Ian Wace, has added Chinese banking and property stocks to two hedge funds, betting a global economic slowdown will prompt an easing in domestic tightening.

China is the largest single-country bullish bet of two global financial hedge funds run by the firm, said their Hong Kong-based manager Amit Rajpal, 38, a former head of Morgan Stanley’s global financials research team.

Debt crises and economic data in Europe and the U.S. have heightened concerns about a double-dip recession and weakening demand for emerging market exports. Banks such as Deutsche Bank AG and Morgan Stanley have cut their forecasts for China’s 2012 economic growth as an aftermath of the slowdown in the west.

“Ultimately we take the view that China would have no option but to end this tightening campaign very soon,” Rajpal said in an interview yesterday. “That itself could be a catalyst for the outperformance of Chinese markets and Chinese banks, which are very policy driven.”

China may be the first major emerging market to ease monetary tightening put in place to curb inflation in order to maintain economic growth, Rajpal said. He cited its closer integration with the world economy through exports and ability to contain inflation within isolated commodities such as pork.

Vanke, Banks

The funds began to buy into property companies such as China Vanke Co., the nation’s largest listed property developer, about a month ago, said Rajpal. They also hold shares of China Construction Banking Corp., Bank of China Ltd. (3988) and Agricultural Bank of China Ltd., three of the nation’s largest state banks.

The Chinese stocks the funds own now exceed the amount they’re shorting by 20 percent of their combined assets under management, according to Rajpal. Shorting involves selling borrowed stocks, hoping to profit by buying them back later when their prices fall.

Marshall Wace Global Financials Emerging Growth Fund returned 2.6 percent this year through July after gaining 17 percent last year. Marshall Wace Global Financials Market- Neutral Fund, which doesn’t bet on general market directions, returned 8 percent in 2010.

Rajpal declined to disclose assets under management in the funds, citing a company policy.

The funds have shorted “slightly” more shares than the amount they own in the past month, Rajpal said, declining to quantify them. It is net short financial stocks in U.S., Europe and emerging markets such as Brazil, which has a brewing credit crisis from previous years’ overlending to consumers and companies.

Global Meltdown

The world could be headed toward a Europe-led meltdown akin to that seen in 2008, with more than a 30 percent drop in stock prices, strengthening of “safe haven” currencies such as dollar and yen, and financial institutions reporting a new round of losses related to revaluation of the sovereign debt they hold, Rajpal said.

The MSCI World/Financials Index has lost 25 percent of its value since the end of April, outpacing the broader MSCI World Index’s 18 percent retreat.

Rajpal prefers yuan-denominated shares traded on China’s Shanghai stock exchange instead of those quoted in Hong Kong. China still restricts foreign investment in its domestic stock market, making it less susceptible to the global aversion to risky investments, he added.

Bullish on Property

The Chinese government raised the minimum down payment for second-home purchases this year and about 40 cities including Beijing and Shanghai started limiting the number of apartments to two for each family, and one for non-locals.

The State Council, China’s chief administrative authority, said last month it will expand measures aimed at curbing home prices to smaller cities after limiting purchases in the largest urban areas.

Rajpal is also bullish about the Chinese property industry because of the country’s double-digit consumer income growth and low debt level, he said.

He likes Chinese banks because declines in share prices have depressed valuations to levels similar to those seen during the global financial crisis. BOC trades at five times 2012 estimated earnings and 0.8 times book value, roughly half of the five-year average, Rajpal said.

Chinese banks have increased the pricing of loans, their fee-based businesses and lifted revenue faster than costs in the last two years, allowing them to retain 30 percent earnings growth even as loan book expansion has slowed on domestic tightening. Those together with loan-loss provisions which now stand at nearly 250 percent of dud loans will offset risks in their infrastructure financing and real estate lending, Rajpal said.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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