“China is one of our bigger overweights at the moment and we are looking to increase it going forward,” he said.
“However, the biggest risk is if China’s aim of driving capacity expansion does not play out. One way this could happen is if, given the heightened emphasis on healthcare, people decide that they need to save a bit more and are less inclined to spend.”
Dehn warned that further market volatility could stem from the heightened emphasis on consumer saving, though he sees this as a medium-term risk that will eventually prove beneficial to the banks.
“China’s long-term savings industry – pensions and insurance – is still immature,” he said. “These savings institutions will eventually form the backbone of the savings industry due to their very long-term investment horizons, but in the interim the market will still be dominated by banks and other short-term investors that at times can generate plenty of volatility.
“Despite these challenges, banks are likely to benefit hugely from the emergence of China’s fixed income market. Chinese savers have far too little fixed income in their portfolios, because fixed income has either been unavailable or has offered unattractive yields due to the suppression of interest rates.
“Chinese banks are likely to exploit what we believe will prove to be a secular demand for Chinese fixed income from domestic investors as well as rising interest from overseas investors as the RMB becomes a global reserve currency.”
Banking on the banks
So how is Dehn’s conviction represented in Ashmore’s portfolios?
In the firm’s Ashmore SICAV 3 Chinese Equity Fund, the financial sector takes the biggest slice of its total holdings at 33.4% of the portfolio. Likewise, financials occupy four of the fund’s top six positions, with these stocks alone accounting for 16.8% of the fund’s 39 holdings.
Dehn added: “Ultimately, we believe that China’s banks will succeed in their transformation to modern private sector lenders and major asset management entities, which will make them extremely influential on a global scale.
“They will, in our view, directly challenge the very largest European and US investment banks across many lines of business.”
