Philip Ehrmann, whose Gartmore China Opportunities Fund rose 14.7 percent during the past three months, is boosting his investment in Chinese retailers such as Wumart Stores Inc., anticipating that China's will remain the world's fastest-growing economy in 2005.
A rise in personal income in China will stoke consumer spending and spur profits at electronics stores and supermarket chains, said Ehrmann, 45, in a telephone interview from his London office. The economy probably will expand 7.5 percent in 2005 after growing 9 percent in 2004. By contrast, the global economy is expected to grow 4.3 percent next year, according to the International Monetary Fund in Washington.
Ehrmann said his optimistic outlook for companies, including Wumart and Lianhua Supermarket Holdings Ltd., wasn't affected by the Chinese central bank's decision on Oct. 28 to raise interest rates for the first time in nine years to curb annual inflation of 5.2 percent.
"It's the consumption part of the economy that we are looking at to play with our portfolio," Ehrmann said. "The reality is, most companies are borrowing at significantly higher rates than the one-year lending rate" of 5.58 percent, he said.
Ehrmann sold shares of Angang New Steel Co. and Aluminum Corp. of China on concern that commodity prices are poised to fall after reaching the highest levels since at least 1995.
The $175 million Gartmore fund, started 21 years ago in Britain, has been open to U.S. investors since July. The fund rose at an average annual rate of 8.7 percent during the past five years, compared with the 2.3 percent decline of the Standard & Poor's 500-stock index, according to data compiled by Bloomberg.
"These funds have been money magnets," said Brad Durham, managing director of EmergingPortfolio.com, an industry research firm in Cambridge, Mass. About half of the $5.28 billion that poured into Asian funds that invest outside Japan went to China funds last year, he said.
Not everyone is bullish on China. The country faces rising commodity costs, and many industries are fragmented, said Adrian Mowat, an equity strategist at J.P. Morgan Chase & Co. in Hong Kong.
"The probability of earnings downgrades remains very high," Mowat said. "You have costs going up and no pricing power."
Wumart's third-quarter profit rose 54 percent, to 23 million yuan ($2.8 million) from a year earlier, as sales climbed with the opening of 22 new shopping outlets. Wumart has 451 stores in Beijing and the capital's neighboring cities, an area with a population larger than Germany's.
Ehrmann, a graduate of the London School of Economics, joined Gartmore nine years ago. He is buying shares of retailers in anticipation that China's 1.3 billion residents will spend more on clothing, appliances and vacations.
Chinese Premier Wen Jiabao told lawmakers in March that the government will focus on stimulating consumer spending and narrowing an income gap between people who live in the city and those in rural areas. The average resident in an urban neighborhood earned more than $1,000 last year for the first time. "Urbanization has resulted in more people starting to exercise their rights as consumers," Ehrmann said.
In September, the Gartmore fund bought 2 percent of Gome Electrical Appliances Holdings Ltd., China's biggest electrical appliances chain. Since June, the fund also added shares of Lianhua Supermarket, a grocery-store operator based in Shanghai, and Li Ning Co., a seller of sportswear under the name of Li Ning, who won a gold medal in gymnastics in 1984.
Ehrmann, who oversees about $1 billion of emerging markets investments at Gartmore, doesn't invest directly in China's domestic markets because of restrictions on capital flows and concerns about corporate governance. He prefers Hong Kong as the gateway, where about 180 mainland companies are listed.
The city also is reaping the benefits of China's decision to ease restrictions on visits by its residents to Hong Kong, Ehrmann said.
His fund this year bought shares of Lifestyle International Holdings Ltd., owner of Hong Kong's Sogo department store, and Hongkong Land Holdings Ltd., the biggest landlord in the city's central business district.
Purchases of clothing, food and jewelry by tourists helped speed the city's recovery from the 1997-98 Asian financial crisis. The economy expanded 12 percent in the second quarter, its fastest pace in four years.
"They are driven up by the liquidity sloshing into Hong Kong," Ehrmann said.