China’s Next Bull Market Is Coming. How to Prepare.
China’s slowing economy and President Xi Jinping’s aggressive regulatory moves have rattled investors and prompted a slide in Chinese stocks. Yet Justin Leverenz, manager of the $51 billion
Invesco Developing Markets
fund (ticker: ODMAX), is bullish on China and Asia. Although he began trimming his stake in
Alibaba Group Holding
(BABA) because of competitive concerns before Beijing’s latest regulations threatened China’s largest internet companies, he sees a bull market in Chinese equities ahead, propelled by cash-rich domestic buyers. He also expects to see a revival in commodities prices that could reverse emerging markets’ decade-long rout.
Leverenz’s fund returned 14% last year, lagging peers. But his record is impressive: The fund has outperformed 94% of peers in the past 15 years, returning an average of 7.6% a year, according to Morningstar.
He recently discussed with Barron’s why he likes Chinese stocks, which technology stars are emerging beyond China, and what investors are missing about commodities companies. An edited version of the conversation follows.
Barron’s: Chinese stocks have taken a beating as Beijing has ramped up regulations, imposing restrictions on companies listing abroad and renewing its focus on social good over profitability. What does this mean for investors?
Justin Leverenz: It is a polarized environment, with China apologists and the tourists—those who don’t have to get involved, and call [China] uninvestable. I sit in between. While much of [the regulation] came in a dizzying fashion, China is going to have an uber bull market in the next five to 10 years. Investment will be domestic in nature.
What will drive the Chinese into the market?
The less-talked-about part of regulations is the focus on not increasing leverage in the system and reconfiguring growth. Part of that is increasing restrictions on property speculation. Chinese households have the second largest balance sheet in the world. That is going to shift to equities, much as it did in the U.S. in the 1980s and 1990s, and drive a significant bull market. A multi-year transformation of the asset allocation of households in China will drive prices. Why would one not be part of this explosive opportunity?
It’s anomalous that a country as large as China has its most important companies inaccessible to domestic savers [because they are listed on non-Chinese exchanges]. The effort to create a domestic market, albeit offshore in Hong Kong, and therefore control capital flows more easily, is an important part of the calculus.
Why is it so important for China to develop its capital markets?
China’s biggest objective is to become independent in an increasingly hostile world. China needs to deal with its fragilities: energy, semiconductors, and [the dominance of] the dollar.
China wants to create a deep, liquid capital market. It is the largest…
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