One-Man Rule a `Huge Plus' for China Investors Seeking StabilityBy
Brandywine favors Chinese banking, consumer and tech stocks
Chen expects U.S. dollar weakness to continue for years
China’s autocratic shift under President Xi Jinping will bring greater stability, boosting the appeal of its stocks and bonds relative to developing-nation peers, according to Brandywine Global Investment Management.
The removal of presidential term limits grants Xi further leverage in his push to solidify trading relationships and boost innovation at home, said Tracy Chen, a portfolio manager at the $74 billion investment firm. That will benefit technology stocks such as Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd., she said.
Brandywine Global also favors China’s big four banks -- Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. -- as concern over non-performing loans is overdone.
“I really like Chinese equities and even bonds,” Chen said. “The government should be more stable under Xi’s continuous term. Compared to other EMs, that’s a huge plus and the market hasn’t taken this into consideration.”
Brandywine Global joins a chorus of investors from Acadian Asset Management to BlackRock Inc. in touting Chinese equities in the aftermath of Xi’s push to end term limits. Bulls argue that political stability, continued economic expansion and increased access for foreign investors to domestically listed stocks support the asset class. Globally, the idea that autocratic regimes can produce some of the best returns is nothing new for money managers.
Chen says she also likes U.S. Treasuries versus lower-yielding European bonds as well as Brazilian and Argentine bonds over most Asian peers.
Here’s what else Chen had to say about emerging markets:
How does the U.S. dollar weigh on your emerging-market bet?
“Dollar softness is not over. U.S. dollar weakness over one to two years usually lasts five to 10 years. It’s a long process. Right now, the weakening of the dollar is too sharp and too fast, so in the short-term you could see a reversal. But we don’t think it’s over.”
What’s the risk of a trade war?
“I would give a 20% probability of a trade war. Trump’s tariff has significantly increased the risk. It depends on how he wants to go ahead with this. If he wants to shrink the current account deficit with China, that’s easily doable. But if Trump wants to punish China on intellectual property theft, that could make it much uglier and China could retaliate. Trump and Xi are strong men and neither wants to lose face.”
Who would be the winners and losers in such a scenario?
“If there’s a trade war or the relationship sours, you’ll see higher yields for U.S. Treasuries. It won’t be a safe haven anymore because the Chinese can sell as they did in 2015. Potentially all risk assets will sell off. Of course, some countries could benefit if China retaliates by buying less agricultural products from the United States. Latin American countries like Brazil and Argentina are two that could benefit.”
How do Mexican bonds look ahead of the presidential vote?
“The Mexican yield curve is inverted, which suggests a recession. But in our model, the bonds are cheap, which in part is a reflection of the risks with Nafta and the election. Still, it’s only a matter of time before the market bottoms.”
What else do you like in emerging markets?
“We also like Peru and Colombia given their high real yields and inflation. Some countries in EMEA offer higher yield, but they also have higher political risks and the governance is hard to handle like in Turkey. We do have positions in South Africa and Egypt.”