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Matrix Asia Ucits Fund becomes long China and short Japan

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The Matrix Asia Ucits Fund has moved net long China, believing that the late cyclical move is likely to last 12 to18 months.



Rupert Foster, manager of the fund, says much has been made this year of the imminent collapse of the Chinese stock market as the Chinese authorities try desperately to control a rampant property market and as the US harangues the Chinese about the relative weakness of the Renminbi. 

When coupled with fears over bad debts arising from the unprecedented credit boom last year in China, the continued focus on fixed asset investment (growing at 27 per cent last quarter) over domestic consumption (growing at 18 per cent), and the high levels of relative wages in China now compared to much of the rest of South East Asia, you have the makings of a bear case.
 
However, Foster says that would be to focus too much on long term issues and to ignore the more powerful cyclical situation.

“I have followed the structural bears and been net short China for much of this year but my rationale was very much based on a mid-cycle ‘over-tightening fears’ phase that I believe China entered late last year. This was confirmed by the negative reaction of the Chinese market to the two rises in the Reserve Requirement Ratio – a proxy in China for government monetary policy – in January and February this year. If over tightening had actually taken place this year in China, macro data might have been slow to pick up on it as much of the data is at best ‘massaged’. 

“Micro data gives an investor much greater conviction – we have been watching consumer data very carefully, focusing very much on low/mid end consumption data rather than luxury data. Had there been over-tightening, this would have led to worsening existing store sales at low/mid-end consumer plays such as Belle, the leading women’s shoe manufacturer and retailer, as consumer confidence waned. In fact what we have seen in China, throughout the summer and autumn, is accelerating existing store sales at Belle and other retailers. This trend has also been confirmed by privately-owned industrial businesses in China, where again, confidence appears to be improving as Capex plans are accelerated or expanded. This gives us great confidence that as this year’s much larger than normal wage hikes of 15 per cent to 20 per cent feed through to the Chinese economy, consumers are spending a larger percentage of the increment.”
 
The fund has moved noticeably net long China since September and Foster says this will only increase in the next month or so. Foster believes the late cyclical move is likely to last 12 to 18 months with the main Canary to be watched being inflation.

“When this starts to rapidly increase from its current 3.7 per cent, the Chinese authorities will have to react and in the end, killing the cycle is better than causing runaway inflation. With Western interest rates where they are and likely to stay there, the liquidity sloshing around the world is likely to encourage a very marked late cyclical rally in China and Asia generally. 

“A 30-50 per cent rise in the H share index seems likely with much of that rise not coming from a rise in earnings but from higher values being paid for those earnings, i.e. PE multiples will rise. We have already seen the first leg of this move since July. In the short term H shares are overbought and susceptible to any disappointment on the quantitative easing announcement from Fed Chairman Bernanke – but this will just present a great further buying opportunity.”
 
Fosters expect Asian markets to hit new highs in the next two to three years and then to surge further as no growth Western consumption and demand disappoint expectations. Asia has emerged from the global downturn faster and stronger than any other region and Foster believes Asia is in a structural bull market.

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