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Investing in a world where ‘money is free’

Both Magellan (ASX:MFG) and Platinum Asset Management (ASX:PTM) have been gaining plenty of unwanted attention lately. Both their hallmark strategies are suffering from periods of underperformance, the former due to a lack of cyclical exposure, and the latter an ingrained value focus. 

It is somewhat interesting therefore that both are banking on China as being central to their recovery. One thing they have in common is e-commerce giant and current Chinese government target, Alibaba (HKG: 9988). The company was recently reintroduced to the Platinum Asia Fund and remains the only Chinese holding in the Magellan Global strategy.

In a similar vein to Hamish Douglass’ recent comments, Platinum highlighted the many misperceptions towards the Chinese market, driven primarily by media headlines. “The danger for Western investors is to not be willing to look at China through a different lens,” said the portfolio manager of the flagship fund.

According to Platinum’s analysis, China’s equity market peaked way back in 2007, along with most developed nations. At this point, it was the most expensive market in the world, trading on a forward price to earnings ratio of 27 times. The market then tanked as much as 68 per cent in just a few months and today, 14 years on, it remains 38 per cent below this high.

This, they suggest, is evidence that China does not look like a country that is about to experience a financial crisis, but one that has clearly already seen it. Platinum is somewhat surprised that the selloff hasn’t been more significant, noting that markets are well off their highs for the year, but only flat for the year to date.

Not unexpectedly, some two-thirds of the International Fund is held in what can broadly be described as cyclical sectors, being energy and materials, financials and real estate, industrials, and discretionary stocks, with a touch of semiconductors sprinkled in for growth. Management used the recent volatility to bump up its short positions, but ultimately, Platinum remains confident of the long-term outlook, albeit not for high-growth tech stocks.

“In a world where money is free, the disrupters are seen to have fewer barriers to their ultimate success than they would do if money was less readily available,” the manager says. The statement clearly articulates the views of a traditional value-seeking investors, with the thesis of growth set to be tested as bond yields continue to drift higher.

Returning to the hyperbole surrounding Evergrande (HKG: 3333) and China’s property sector, they are quick to highlight how “unremarkable” this looks in comparison to say Sydney, Auckland, or Toronto. Chinese property prices have barely kept up with their developed market peers, with domestic buyers facing the highest loan rates in the world, and the need for 30 per cent deposits, rather than the 20 per cent deposits seen in Australia. It is this confidence that has meant holdings in large residential real estate developers China Vanke (SHE: 000002) and China Resources Land (HKG: 1109) have been retained.

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