Invesco Perpetual head of Asian equities Stuart Parks says he sees Chinese industrial stocks as a “value trap”.
Parks sees the slowdown in China coming from investment growth, which is infrastructure and industrial-led growth.
He says: “There is going to be a rebalancing from investment towards consumption. In the long-term, it is absolutely right. It is likely to lead to lower rates of growth for the economy, but more balanced, sustainable growth rate inn future.”
Parks says companies related to infrastructure and industrial growth will be under pressure. He gave the example of Chinese steel maker Angang Steel.
“This company looks cheap, trading below book, but it should do, as it is never going to make over the course of a cycle its cost of capital. The state wants to keep employment high and the steel plants going, which has led to an oversupply of steel in China. Pricing is never going to reach levels that is going to be consistently profitable. These companies are ‘value traps’.
“There has been a rally in these stocks over the last two to three months, as they are believed to be the beneficiaries of accelerated Chinese growth. In the short-term, they may benefit from further growth, but in the longer- term, you have to be careful about investing in this area,” he says.
He looks for companies that will perform well irrespective of growth. Parks is underweight towards the consumer discretionary sector with 4.61 per cent invested in the sector in the Invesco Perpetual Asian fund.
The fund manager says it is important to make sure the right price is paid for stocks in this sector.
“There are far too many stocks that are discounting far too high growth rates. Competition will be huge and you have to factor that into pricing and ad spend. Ad spend is going one way, which is up,” he explains.
He says 12 per cent earnings per share growth in China is too optimistic and the fund manager consensus is more like 10 per cent.
Park says he is also looking carefully at adding to India. He says that reforms have been positive and he expects further improvement.
He adds: “Some members of the coalition did not like some of the reforms, but there was not mass defections. We are not too excited though. There are still limits to what can be achieved and structural issues in India need to be addressed. We are looking at increasing our India expsoure, but the market is not cheap enough at the moment.”