Are disciples of Benjamin Graham throwing in the towel in Asia?
According to Ronald Chan, founder and chief investment officer of Chartwell Capital Ltd., value investors have become powerless in the face of a tidal wave of liquidity. Since January, mutual funds and ETFs have poured $116 billion into Asian equities, with much of that flowing to blue-chips. Receiving particular attention have been the so-called dragon heads, stocks investors believe are likely to benefit from a broad-based economic recovery. Small and medium caps are being left behind.
Even in mainland China, where small growth stocks have typically dominated, the Beautiful 50, a term for the 50 most influential companies on the Shanghai Stock Exchange, were defying gravity until state-owned Xinhua News Agency called out the exponential rise of liquor maker Kweichow Moutai Co.
All this makes a terrible environment for value funds. One way for them to stay relevant is to mutate and adapt to the new environment, a topic of much discussion at Thursday's annual Asia Value Investor Conference in Hong Kong.
It was a bit surprising to hear Moutai and fellow distiller Wuliangye Yibin Co., whose shares are up 91 percent this year, described as value stocks. The duo trade at just over 16 times earnings, 25 percent cheaper than Diageo Plc.
Another firm highlighted was PC Partner Group Ltd. The Hong Kong-based firm designs and develops video-graphics cards and has caught onto the cryptocurrency craze, helping to send its shares up 57 percent since January. Is that expensive, though? Not if compared with Nvidia Corp., which has risen 77 percent.
Pitting a Chinese high-end liquor brand with a dominant market position against a diversified spirits maker like Diageo, or putting a small-cap stock up against a large one, may not be fair. As I wrote in October, Moutai deserves a valuation discount because of political risk. A 750ml bottle can cost more than $200, well beyond the reach of many ordinary Chinese households. Guizhou, one of China's poorest provinces where Moutai is based, could ask the company to contribute more to local-government revenue. Moutai is state-owned, after all.
Unless you're Elliott Management Corp., with the muscle to stage public battles against powerful conglomerates, smaller funds have no choice but to adapt. One fund manager at the conference talked about his success with Japan's Aichi Electric Co., whose shares have gained 59 percent this year. But because Aichi Electric is a small stock with less than $100,000 in trades each day, it took him two years to accumulate his stake.
Kweichow Moutai shares, YTD
And what's value without growth? Qingling Motors Co., which produces light-duty trucks in China, seems a good income play with a 7.5 percent dividend yield. Michael Liang, chief investment officer of Foundation Asset Management, however, considers it a prime example of why investors can't just copy and paste value-investing techniques to China. Qingling Motors hasn't seen any top-line growth, so its year-to-date return of 12.4 percent pales next to the spectacular rally of, say, Geely Automobile Holdings Ltd. Hard for any fund manager to justify such a position in his or her regular newsletter to investors.
If the Hang Seng Index were to dip below its 50-day moving average, that needn't be too much cause for concern. But when value investors start to capitulate, then it's time to worry.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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