Against a backdrop of weak Chinese economic data and a troubled banking sector, Aberdeen head of China equities Nicholas Yeo believes badly run companies continue to pose the ”highest risk” to Chinese investors.
Yeo acknowledges potential macroeconomic risks stemming from China’s banks and indicates that the banking sector proves a tricky investment for the £3.4bn Aberdeen Global Chinese Equity fund.
He says: “What we see right now on a macroeconomic front as a potential risk is in the shadow banking which has proliferated over the last two to three years.
“Right now we still find certain hurdles to finding good companies. For example the banking sector is still a difficult one given the interference with government policies.”
However Yeo goes onto argue that despite these risks, “it still comes down to the individual companies” when investing in China.
He says: “We are trying to protect investors from badly run companies because this is what we feel is the highest risk when it comes to investing in China.
“Chinese companies are not mature enough in the way that they treat minority shareholders and as a result of a very low governance standard, due diligence is much more important than in other markets in the region.”
Yeo details the fund’s process of trying to “strain out the bad companies from the good ones”, currently creating a skew toward domestic consumer and Hong Kong companies in the portfolio.
In general Yeo says he finds the quality of Hong Kong companies higher than those on the mainland, as they have existed for a much longer time and consequently know how to care for minority shareholders.
Elsewhere Yeo highlights an interest in stocks with indirect exposure to domestic consumption. The fund currently features several shopping mall operators in the portfolio as an example of this indirect play.