Henderson’s Kerley: China crisis like ‘a murder without a body’

The current talk of a crisis in China and other Asian markets are like “a murder without a body”, says Henderson Global Investors fund manager Michael Kerley, who argues consumption and reforms will continue to drive growth. 

“I do feel that the chances of a crisis in Asia are very low. Most Asian countries have trade and current account surpluses, high levels of foreign exchange reserves and relatively low levels of debt,” says Kerley, who manages the Henderson Asian Dividend Income fund.

The recent volatility in markets has increased risk aversion resulting in significant outflows and weaker currencies across the region, however, “it is important to note that this is a move based on liquidity and not solvency as short-term interest rates – the best indicator of stress – remain unchanged”, he says.

He adds that exports, which remain weak both globally and locally, are not the main source of growth as they were in the past, but consumption and reforms will drive growth instead.

In the period between 2003 and 2007 average export growth in North Asia, Singapore and Thailand was 21 per cent year on year, but this figure fell dramatically from 2012 to June 2015 to 3.7 per cent, according to data provider CEIC and Morgan Stanley data.

Kerley adds: “Clearly growth is slowing especially in manufacturing and export-orientated sectors but consumption remains resilient and reforms embarked upon in places such as India, China, Korea and Indonesia should help improve the quality of growth, if not the quantity.”

For China, he says: “The impact [of the changes] was always going to be for slower overall GDP growth but with greater longevity and lower cyclicality.”

Despite the market falls, investors need to focus on stock fundamentals, he says.

“Markets are suggesting a recessionary environment with markets trading within 20 per cent of lows set during the financial crisis. [But] we see nothing in the companies we invest in or the economies in which they operate which would suggest these levels are appropriate,” he adds.

In his Asian Dividend Income fund Kerley has a big underweight to financials as the asset class is “getting worse” especially the banking sector, but he is more positive on IT and healthcare aided by the rapidly ageing Asian population.

Recent moves by the Chinese government have seen currency devaluations and a reduction in interest rates, but their interventions are not over, says Henderson China Opportunities fund manager Charley Awdry. 

The Chinese government will continue cutting interest rates as well as on lowering the reserve requirement ratio to further increase liquidity in the market, he says.

“The Chinese market is currently divided into two where you have mature businesses, which have cheap valuations, and tech firms,” he says. ”We have to see – is China’s President Xi Jinping going to continue to reform or is he giving up control?”