With global stock markets swinging like a pendulum following the Chinese authorities’ widening of the yuan-dollar trading band last month, implications for the Shanghai Composite have been by far the most severe.
While some have expressed the view that the primary motivation for the devaluation was an attempt to boost export growth in the country, Awdry, manager of the Henderson China Opportunities Fund is in the camp that believes the move was driven by a desire for more currency flexibility – i.e. more susceptible to market forces – in a bid for admittance to the reserve currencies basket.
“If you compare the difference between the yuan and other currencies, the small move that the Chinese made – around 3% – does not make any sort of impact at all,” he explained.
“The real reason that they revalued was to have more flexibility, particularly seeing as they did it after the IMF said it would not include the yuan in the special drawing rights currencies as it was not flexible enough in reflecting market forces.”
However, this decision has proved to be a risky one, and could lead to both a drop in interest rates followed by President Xi dropping the ball on corporate reforms.
“The move has indeed opened them up to market forces,” said Awdry. “And of course there are quite a lot of bears out there.
“Right now it looks as though President Xi is a bit concerned about giving up control over the market. He is trying to grow, reform and deleverage, and could panic a little bit on the growth side, which may lead to him scaling back the reform.
He continued: “Furthermore, the Chinese are very likely to do more policy easing. Although they have cut interest rates, if you adjust for inflation then real interest rates are still quite high.
“The hiccough for interest rates is that if the Chinese lower them dramatically then capital outflows could increase, particularly if the Federal Reserve raises US rates. It is complex, but we do see room for further easing.”
So, all considered, how is Awdry’s money distributed given the somewhat ominous outlook?
“This a new landscape for businesses to operate in, and as an investor you need to be careful of companies with US dollar debt,” he said. “We do have some money in the A-shares and B-shares markets, with most of it in Hong Kong-listed companies.”
Awdry’s interest rate view translates into a 15.7% underweight to the financial sector, with Bank of China having accounted 3.3% of the portfolio in June but the sector as a whole now representing less than 1%.
“We are very underweight in financials,” he said. “I have been selling Chinese banks throughout the year because the asset quality issues are getting worse and I think that they will stay cheap for at least five years.”
Awdry is instead focusing on consumer-facing business, picking up stocks in consumer discretionary, IT and healthcare, which account for portfolio overweights of 12.4%, 8.6% and 4.6% respectively.
He said: “Healthcare is a great story for many reasons, but the main one is that the government cannot control it. It is demographic – there is a rapidly ageing population, they are wealthier and will spend more money to look after themselves.”
