Still bullish on China

But Value Partners founder Cheah Cheng Hye sees a global financial crisis happening ‘sooner or later’.

CHAIRMAN of Value Partners Group Ltd Datuk Cheah Cheng Hye saw the 20% correction in Chinese stocks coming.

That’s before the Shanghai Stock Exchange Composite Index (SSE) peaked in mid-June, after surging 150% in a year.

At a time when experts from the West are trimming China’s economic growth forecast to below 7%, Cheah holds on to his bullish views on China’s growth in the long term.

Morgan Stanley cut its estimates for mid-2016 for the SSE after the index fell some 13%. The new target is 3,250 to 4,600 compared with the previous year end target of 4,000 to 4,800.

Others say the Chinese stock market, fuelled by margin financing, is worrying.

Cheah thinks this could be the greatest shift of asset allocation - from the Chinese public’s savings in the form of bank deposits to the stock market.

“You cannot invest in China like you’re investing in the West. The policies are different here. I’m talking about it as someone who’s close to China,” he says.

Cheah went into the investment banking scene in Hong Kong 26 years ago when he joined Morgan Grenfell. Before that, he served in international financial publications like Asiaweek, Far Eastern Economic Review, and Wall Street Journal.

To stay in the game of stock investment, the founder of Value Partners, who oversees US$17.5bil of assets, say: “It’s no use to just go to the stock market just for fun and be poorly informed. At the very first correction, you’re shaken up.”

His advice: commit your life to research, read and know what you invest in to stay on top of the game. Otherwise, let the professional fund managers do the job.

Value Partner’s asset under management (AUM) has grown 75% in a year. It was started in 1993 with Yeh V-Nee with an AUM of US$4.5mil.

The firm’s net profit had more than doubled last year compared with 2013. Despite the stellar growth, he believes that the firm is in a sweet spot and is well positioned for the multi-year bull run ahead.

The fund management firm make 2,500 company visits every year and collects massive information from its thorough research.

Cheah is an avid reader. On top of the 2,000 over e-mails he has to go through every working day, he’ll read three to five newspapers.

He carried Howard Marks’ The Most Important Thing illuminated with him during the interview with StarBizWeek as he wanted to recollect essays of the chairman of US-based Oaktree Capital Management that has an AUM of US$100bil.

The other book is On China by Henry Kissinger.

“I want to understand an American’s view on China,” he says.

So, will the rally in the Hong Kong and China markets continue?

“Yes, but not in straight line. Bull markets must climb a wall of worry. If nobody is worried anymore, you can be assured that the bull market is already over.”

More volatility is anticipated, particularly for Shanghai Stock Exchange and Shenzhen Stock Exhchange Composite Index but he felt that the Chinese government would “manage” the situation if the stock market overheats or cools down too drastically.

“With more than 210 million retail traders concentrated mostly in big cities, you can’t afford a crash.”

He expects a “soft-landing” for the correction, which could be at 20%.

“So, there’ll be corrections as much as 20% from time to time.”

“The Chinese practise state capitalism where the government decides what the priorities are and they control the system to a significant extent. If you’re an investor in China, you won’t behave like you’re in the US or Europe,” he says.

“Stock market became a dirty word. So many people had lost money in the A-shares that nobody wanted to talk about stocks anymore,” he says.

The Chinese have opened more than 20 million new trading accounts in the first five months this year.

“Most of the Chinese still put their money in bank deposits or real estate. Only about 10% of the world’s largest pool of savings go into the stock market.

“Imagine if the percentage goes to 15% or 20%, it’s tremendous!”

The Chinese government is also easing capital flow between markets, which bodes well for the giant economy’s capital allocation.

“An apple in Shanghai costs a lot more than an apple in Hong Kong because of capital controls. Until recently, you cannot perform arbitrage very well,” he says.

Even after the recent correction, Shanghai Stock Exchange is trading than at a higher historical valuation of close to 20 times compared to Hang Seng Index’s 11 times.

“We’re very interested in buying the shares listed in Hong Kong as they’re much cheaper than those listed in Shanghai.”

Besides China-related stocks, he’s also bullish on commodities.

He thinks that oil prices should be trading at US$70 per barrel in the next one year with the potential of recovering to the US$100 per barrel level in three years.

He also likes agriculture related commodities and gold.

In Malaysia, he likes palm oil companies with operations in Indonesia. Demand of agriculture related commodities will continue to come from China and India.

Value Partners recently emerged as a substantial shareholder in kitchen system designer and distributor Signature International Bhd with a 5.28% stake. But Cheah declined to comment on a particular stock.

On the world economy, Cheah is pessimistic.

“The world is in a mess. There’ll be a financial crisis sooner or later, that’s my personal opinion. But nobody knows when exactly.”

There’s too much borrowings, too much deficits and too much money printing.

Governments have cut rates to very low points there’s not much left to be cut so they are running out of cards to play.

“Social unrest will be a bigger issue that what’s happening on paper. That’s why gold should do well in the long term.”

He advises people to hold cash even though interest rates are low so that it comes in handy when buying opportunities emerge.