Miserable’ 20 years for China investors, says Schroders

Schroders head of Asia ex-Japan equities, Robin Parbrook, has poured scorn on returns made by investors in China in the last two decades, and warned the country still faces major challenges.

Speaking at a press briefing in Hong Kong this week, the manager of the $1.4bn Schroder ISF Asian Total Return fund said returns for investors had been low because  many of its largest businesses are state owned or backed, meaning they are less concerned with delivering returns to shareholders.

He said: “You would have lost 40% of your money in China over the last 20 years. On a long-term trend, it has been a pretty miserable place – you would have been better in the US.”

While returns in the last three years from China funds have beaten many counterparts in other sectors, the region has struggled along with other major economies in the recent downturn.

Parbrook said this meant the idea China will help support the economic recovery in the West is misguided.

“When you take a bottom-up view on China, you cannot help but be bearish. The bad news is stock market decoupling is a complete lie. The market is full of cyclicals, and much of the index’s earnings are global. The FTSE 100, for example, does not proxy the UK economy, it is full of international companies.

“Everyone thinks China will ride miraculously to the rescue of the West. But it will not. The credit to GDP ratio is increasing, and stimulus has all gone into creating a property bubble. Most people look at China wrongly – you need to see it on a bottom-up view. Company returns to shareholders is what drives market returns.”

Looking to the banking system, Parbrook said he is expecting a large spike in loan defaults in the next two years when a raft of loans come to maturity. He is underweight the financials sector and does not hold any banks across his portfolios.

“It is not enough to cause a financial crisis, but there are bad loans to crystallise,” he said. As asset growth continues across the banking sector, it will be mirrored by share price falls, he predicted, following the trend of Royal Bank of Scotland in the UK, for example.

Meanwhile he added the Chinese property market is set for a painful correction as supply outstrips demand. “Property is definitely in a bubble. Supply is running way ahead of demand, and what causes a property crisis is always oversupply, it is not demand driven. Property prices are 40 times earnings in China’s major cities, compared to three or four in the UK. China is one of the most unequal countries in the world, and it has got all the ingredients for a pretty nasty property bust,” Parbrook said.

He said the yields on real estate company debt point to the bond market’s lack of confidence in the sector, and the bond market tends to reflect reality earlier than the equity market, where inexperienced analysts in China often make ill advised buy recommendations. Parbrook pointed to Evergrand Real Estate, which had 18 buy recommendations from stockbrokers recently against two sells, but has a bond yield of almost 16%. Parbrook said: “Bond markets typically ‘get it’ more than equity markets – equity analysts are still putting buy recommendations on these real estate companies, but the bond market thinks they are very risky.”

Despite his bearish outlook on China, Parbrook said it is a different story for the rest of Asia, where balance sheets are “rock solid” and companies have typically been cautious with their cash. “Asian markets are at fair value on price to book but cheap if you believe earnings forecasts. If markets go 10%-15% lower we would be buying. We would be happy buying at 1.4 times price to book, but if it gets to 1.2 times you should fill your boots,” he said.


This article first appeared on Global Pensions.

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