By Jesus Segarra Sobral | 07:00:00 | 04 February 2010
The founder of Asian Growth Investors has lined up with Fidelity’s Anthony Bolton and First State’s Angus Tulloch, who last week soothed fears that a bubble is building up in China. AAA-rated Gustav Rhenman says the recent flight to US dollar assets has dried liquidity in Asian markets and created another round of unfounded China panic.
Stockholm-based Rhenman said several factors have contributed to the weak performance in many equity markets around the world. ‘Investors seem concerned about the reversal of the easy money policies in several countries meaning less money chasing stocks. There is also an element of profit taking after the strong equity market rally last year which attracted substantial flows especially in the wake of the massive Chinese stimulus package.’
‘Several influential international brokerage houses are using statistics like a drunk uses a lamp post; more for support than illumination. For example, China’s slightly rising CPI number and rising property prises in some major cities are used to support the case that China is overheating and that policy makers will slam the brakes by raising interest rates, strangling credit growth and the like. This view is simply wrong,’ said Rhenman.
Gustav Rhenman argues the rise in the CPI is largely due to rising vegetable prices, in turn a consequence of extreme weather conditions. Similarly the bubble in real estate is limited to a few small picket of China’s enormous real estate market.
‘Housing prices in 70 large and medium-sized cities across China rose at a modest 7.8% year-on-year in December, and 5.7% and 1.2% in November and October respectively, compared to the same periods last year. In other words, property prices in China are actually rising slower than disposable incomes are rising. Sure, there will eventually be corrections in Shanghai’s property market, but that will not in any significant way impact the growth trajectory of China’s economy,’ said Rhenman.
The manager anticipates market headwinds because of expected profit taking, fear of rising interest rates, the withdrawals of stimulus packages and reasonable valuations of companies.
‘Chinese valuation levels are not high in a historical context. On 2009 earnings estimates the average price to earnings multiple is 16 and on this year’s estimates a multiple of 12. On a price to book level, Asia ex-Japan is now trading on average around 1.8, not far from the 30 year historical average. We believe earnings are more likely to be revised upward than downward during the year,’ Rhenman said.
Over the three years to the end of January, his AGI China East Asia fund has posted a return of 36.5% in dollar terms, compared to a 9.7%% rise by the MSCI AC Far East ex Japan index.

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