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Schroder's Parbrook: Chinese GDP numbers are meaningless

Schroder's Parbrook: Chinese GDP numbers are meaningless

Schroders head of Asian equities star Robin Parbrook believes China will slow dramatically next year and produce GDP growth well below official figures.

Parbrook has long held a bearish view on China and remains deeply sceptical over its state-owned enterprises.

While he thinks the structural change and efforts to switch from an export focused economy to a domestic growth model will be a painful one over the next few years, and lead to a dramatic slowdown, he is slightly more encouraged by the new leadership's recognition of the problems that face the country as it looks to do the necessary rebalancing.

The Citywire AA-rated manager, who runs the Schroder ISF Asian Opportunities, told Citywire Global: ''GDP will slow as China rebalances, and we think Chinese stockmarket returns are negatively correlated with GDP growth.

'The more China pumps up its growth numbers the more people get excited but the numbers are meaningless. The [official forecast for ] 7.8% GDP growth number is super lucky in China but it is meaningless.'

'State run enterprises can push levers to keep things ticking along but the more [the government] ignores a meaningful rebalancing of the economy the more they risk a huge financial crisis.'

Parbrook is particularly concerned about China's giant state-owned banks and the asset bubble in property they have helped to create.

'The government needs to put more money in people's pockets which would make the average man on the street reasonably happy but rebalancing means the crony capitalists would miss out. The more China's banks have invested the more they are in trouble. They continue to claim 15% growth year-on-year but their earnings are fictitious.'

'They are twenty times leveraged so better quality but slower growth is needed. I am worried about the fact that debt to GDP has gone from 110% to 220% since 2007 and CLSA thinks it can go to 240% which would be bad news.'

Wrong side of the trade

Asean markets did well until the end of June but since then, North Asian stocks such as Korean financials, Macau gaming stocks and Chinese internet companies have outperformed and Parbrook admits to being on the wrong side of that  trade and suspicious of the reasons behind it.

Parbrook, who also runs the Schroder ISF Asian Total Return fund alongside AA-rated Lee King Fuei, believes the sell side analysts to be talking up the North Asian region to investors, which has led to the rotation out of fully valued Asean stocks into more cheaply valued but poorer quality cyclicals and state-run firms in China and Korea.

'Nothing is wrong with the Asean economies but they were overdue a slowdown as they have looked frothy for 18 months,' he said.

'Asean stocks did well until the end of June and we had sold most of them by then but it was what we did not own that hurt us as there has been a dash for trash with everyone rushing out to buy highly geared cyclicals.'

'State-owned Chinese enterprises and Korean companies have done well since then but they have bad corporate governance and Korean companies don't pay dividends. Macau gaming stocks and Chinese internet stocks are also going up but they also don't score well on governance.'

'What has been going down has been Asean stocks such as Thai banks and Hong Kong industrials and we have been able to pick up some Hong Kong property stocks on 50% discounts to NAV.'

Overweight Hong Kong blue chips

Parbrook's biggest overweight remains to traditional Hong Kong blue chips, which he views as the most transparent companies and best dividend players in the region.

He now believes the 'old Hong Kong' companies - such as conglomerates Swire, Jardine Matheson  and Hutchison - look too cheap considering the diversity and quality of their businesses.

'These three companies have 400 years of corporate experience. They are well run and well diversified, are almost completely net cash and trading on 11 times earnings. Compare that to new Hong Kong companies such as [internet firm] Tencent. That is quality but looks expensive.

Parbrook also continues to like Taiwanese tech and said that Asia currently looks to be 'fair value at around 7-9% growth per annum'. He remains relatively optimistic about the region's fortunes over the mid to long term. 

'We cover 600 stocks and the average upside to fair value is now around zero. But you must strip out Chinese banks and then you are looking at 5-6% capital growth for the region and a potential 4% dividend also. In the 'new normal' environment  10% annual total return would be pretty good.'

Over Parbrook's tenure on the fund from 1 October 2010 to 9 October 2013, the fund has returned 18.1% compared to 11.7% by the MSCI AC Asia ex Japan TR USD benchmark.

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