Zhang believes it is time to give people a “slightly different” perspective when approaching a fast growing emerging market like China, because even if growth in China is facing headwinds, under the surface the trend is going in many different directions.
And even though China’s economic growth rate is declining in absolute terms, the structural transformation China is going through at the moment means that some sectors will grow and some will not, thus “evening out” the underlying story, according to Zhang.
The growth sectors include education and consumer, he said. Every time San Francisco-based Zhang goes to China he looks for business models whose markets have not caught up, and last time that included one or two private education companies that provide the growing Chinese middle class households with Canadian or British curriculums. “Both valuation and dividend yield look intriguing,” commented Zhang.
“Businesses that are cash generative with direct exposure to consumers perform very strongly in terms of brand positioning, pricing power and SRI focus, which is key,” said Zhang. The fund manager explained that the team travels to China a few times a year to meet companies.
Other interesting sectors include healthcare, telecoms and infrastructure according to Zhang. “Sector bias is embedded in the way we look at things,” he added.
With regards to the volatility being seen in the region this year, in mainland China and the wider Asian market “volatility is a way of life”, according to Zhang.
“When a long term investment mentality is not in place, people choose short term goals and will always run into problems,” noted Zhang. “On the small cap side it is still very expensive. We are more constructive on A-shares. More foreign investors will participate; that in itself will be a long process,” he added.
Zhang further added that the Hong Kong market, which sold off aggressively, now offers more attractive investment opportunities in his view.
