Fortune favours the brave in China

An increasing intransigence from authorities in Beijing toward private enterprise - and harsh pandemic restrictions - might be keeping some investors away, but the same factors are creating good opportunities in Chinese stocks.

That's the view of Tribeca fund manager Jun Bei Liu, the Shanghai-born investor who will be presenting her stock pick for the year at this month's Sohn Hearts & Minds conference in Hobart. At past events, Ms Liu has tipped stocks whose fortunes have been linked to the Chinese economy, particularly the growing middle class - including Treasury Wine, A2 Milk and New York-listed New Oriental Education.

While much has changed in China since her last appearance two years ago, Ms Liu believes a resurgence in spending and travel in the West is an indication of what will happen once Chinese authorities open their country next year. “Right now, we see some deep value opportunities,” she told The Australian.

“We have seen a tremendous fall in the Asian sharemarkets and in companies exposed to the Chinese economy. The Covid-zero policy is really suppressing earnings now. But we can see a lot of cheap, high-quality companies.”

Ms Liu expects the Chinese economy to start opening from around Chinese New Year, with more restrictions easing by late 2023. “The Chinese consumer has been locked down for a long time,” she said. “If you look at China, there are more than a billion people and more who want to get out and spend their money on services - not just goods but also services and experiences. Given where share prices are now, and where earnings are going, we certainly see opportunity.

“The road map we have seen in other markets will be replicated.

“Right now, there are very low expectations on earnings (for Chinese companies) but we know they will come back because the consumer is going to be a big focus for the economy.”

But investing in China is not for the faint hearted, Ms Liu said, or those who do not follow the shifts in government policies.

“In investing across Asia, you have to be very selective. You have to be very mindful of what policies are coming,” said Ms Liu, who manages about $1.1bn.

“You don't want to stand in front of a policy change. You don't want to be in disharmony with the socialist objective. It does require a lot of understanding and experience in the market.”

Ms Liu's interest in Chinese shares dates back to the 1990s when her father, an engineer who worked for a state-owned enterprise, began investing in the newly created local sharemarket, then a wild west largely driven by retail investors. She recalls having his sharemarket charts plastered around the walls of their home and her father discussing the implications of the market's moves.

“We didn't have a computer,” she said. “My father just started charting the share prices. He had sheets on the walls which went all around my room, around his room, down the stairs and into the living room. Every morning he would look at the charts and say ‘if the market goes up, it will do this, if it goes down it will do that'. He was constantly measuring it.”

While she did not follow his approach of charting, Ms Liu says she learned one thing from watching her father invest - the value of diversification. “He worked out if a share falls in one sector, there were other sectors which will do better,” she said.

Ms Liu moved to Australia at 16 following her mother, who had arrived as a student after the Hawke government relaxed restrictions on Chinese migration.

She later became involved with the local market by working for newsletter writer Ian Huntley, who later sold his business to Morningstar where she started her career as an analyst in 2002.

She joined Tribeca in 2005 and was working on plans for it to expand its investments in Asia when she was asked to take over the Tribeca Alpha Plus Fund.

When she took it over in 2019, the fund had assets of about $340m. So far, the Alpha Plus Fund has only invested in Australian shares. But Ms Liu said the company was planning to launch a fund with more focus on Asia - something which has been a longtime “dream” of hers.

She said Asian shares were down because of the weakness of the Chinese economy, which dominates the region, and the strength of the US dollar. The strong dollar is creating inflationary pressure in Asia and putting pressure on governments because their borrowings have all mainly been in the US dollars.

But Ms Liu argues that markets have already factored in the big rise in US rates which has happened this year and has some way to go. “The US dollar is already pricing in these lofty expectations,” she said, adding a combination of an easing in the value of the US dollar and a slow recovery of the Chinese economy will improve the outlook next year.

Ms Liu said investors have to be prepared to make mistakes. “If you don't make mistakes, you are not taking a risk. You tend to sit on the fence too much. You don't get it wrong, but you don't get it right and you don't learn anything.”

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This article was originally posted by The Australian.

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