China's Top Macro Fund Wagers Against Consumption-Driven GrowthBloomberg News
Congrong sees wage growth slowing abruptly in second quarter
Lu Jun's fund is keeping stock exposure low and fully hedged
China’s top-performing macro fund is betting against one of the primary drivers of the nation’s economy: Consumption.
Lu Jun, whose Congrong Allweather Fund returned 91 percent last year, says wage gains will slow abruptly as early as the second quarter as companies struggle with falling profits. That’s going to hit consumption and may result in retail-sales growth more than halving to 5 percent by the end of 2016, he said, citing his company’s own calculations.
Lu’s bearish outlook is at odds with President Xi Jinping’s effort to shift the world’s second-largest economy into one powered by consumers, and it’s a contrarian wager against the mainstream view that retail spending will remain a major pillar for growth. The money manager’s conviction has prompted him to shift more of his fund assets into cash and short-term bonds, while paring stock holdings.
The disparity between China’s rising wages and the slowing economy "certainly has a limit. It will shrink,” Lu said in an interview from Shanghai, on the sidelines of a hedge fund conference organized by Shanghai Suntime Information & Technology Co. “Our macro view for this year is how to make money by taking advantage of this shrinkage.”
Lu said he’s keeping stock exposure low and has “fully hedged” all such holdings with short positions in equity-index futures, while declining to mention any specific securities. He’s also holding “a lot of cash” and money-market securities as he’s bracing for further declines in the stock market amid slowing growth. The Congrong fund returned a cumulative 243 percent over the past three years, ranking as the best of 50 Chinese funds that bet on macroeconomic trends, according to Shanghai Suntime.
Lu started Shanghai Congrong Investment Management Co. in 2007 and formerly was chief investment officer of JPMorgan Chase & Co.’s local asset-management venture. Lu, who manages more than 8 billion yuan ($1.2 billion), said stock valuations are still high, even after a summer rout wiped out $5 trillion in market value and the benchmark Shanghai Composite Index has tumbled 24 percent this year.
Congrong Allweather Fund beat rivals last year on stock and bond bets based on Lu’s judgment that China would lower interest rates, he said. That compared with an average 49 percent return among all macro funds in the country that have been operating for more than a year, according to Shenzhen Rongzhi Investment Consultant Co.
Some money managers have gotten increasingly dour on China, whose economy expanded last year at the slowest pace in a quarter century. Huang Weimin, China’s top futures trader after scoring a 6,200 percent return in 2015, is advising investors to stick to cash because he expects the Shanghai gauge to drop further as slowing growth fuels outflows. Billionaire investor George Soros has said China’s economy is headed for a hard landing, which will drag down stocks.
China is in the throes of a transition from an old economy dependent on manufacturing and investment into one driven by services and innovation, as its leaders have been seeking to boost consumption and wages to get away from a reliance on exports after the global financial crisis exposed the risks of such a path.
Those efforts have gained traction -- consumption contributed 66.4 percent of China’s economic expansion last year, while the pace of increases in disposable income surpassed the rate of growth in gross domestic product.
The services sector, which hires hairdressers, couriers, bankers and computer engineers, has also bolstered China’s economy by contributing to more than half of the nation’s total output last year. Movie cinemas across the nation saw a 49 percent jump in box office sales in 2015 from a year earlier.
The government is facing fresh headwinds this year, as wage gains slow and uncertainties mount over the pace of employment growth. Policy makers have prioritized cutting excess industrial capacity, which will lead to a loss of jobs. Per capita disposable income rose 7.4 percent in 2015 from a year earlier, according to inflation-adjusted data from the National Bureau of Statistics, compared with an 8 percent increase in 2014.
As the gap between wage growth and economic expansion narrows, economies depending on Chinese consumption will suffer but China’s overall growth may be fine as businesses have been “preparing for the winter” by hoarding cash, Lu said.
Congrong Allweather’s bearish index-futures positions are now equivalent to its stock holdings, the maximum allowed by the exchange after the government tightened rules on shorting last year in a bid to stem a market rout, he said.
“We’ll just wait and see, till the storm passes,” Lu said
— With assistance by Dingmin Zhang