Mark Dampier: Chinese market has all the right goods

The Analyst
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The Independent Online

Even the most experienced fund managers occasionally go through a bad period. For Henrietta Luk, manager of the Melchior Asian Opportunities Fund, a particularly torrid time started in November 2007 and lasted for approximately a year.

This was a tough stretch for most fund managers. The extent of the US sub-prime mortgage problems were coming to the surface, and plenty of people – Miss Luk included – thought they would be fairly well contained to the West. She therefore chose to remain fully invested and didn't take profits in some stocks that had had an extremely good run.

As we now know, the West's woes had a knock-on effect on stock markets across the whole world. There was a pronounced sell-off and the areas that had risen the most were worst affected. The fund therefore found itself battling a fierce headwind and fell by more than many of its peers. Furthermore, her overweight position in Taiwan (although it proved correct in the end) contributed to the poor performance as that market's reliance on export markets meant it bore the brunt of the selling.

However, Ms Luk's 22 years of investment experience meant she was able to regroup, and she made the smart decision to take money out of Korea before the won collapsed by around 30 per cent. By November 2008 she had identified several areas where she felt Asian markets had become far too cheap and, by January this year, she was fully invested, concentrating on the Greater China region which has now bounced back extremely well.

So the fund has gone from being one of its sector's worst performers in 2008 to one of the best in 2009. Before this strong rally began, Ms Luk was amazed by the available low stock valuations. In some cases, she was able to buy shares in a company at a price that actually valued the firm less than the amount of cash it had on its books. This was at a time when some of her competitors, spooked by the massive market fall, had been somewhat scared off and were not fully invested.

Her overweight position in Taiwan then started to work spectacularly – the tech sector, which is a major part of that market, has been a top performer this year. So, overall, we have seen a major profit-margin expansion with much better company results and big earnings upgrades by analysts. The auto sector has also seen spectacular recovery – year-on-year car sales in China are up 80 per cent.

While stock valuations are no longer outrageously cheap, Ms Luk believes they are actually better than they were in October 2007. In my opinion, Asia as a whole looks strong on a long-term view, and the Greater China region is perhaps the most promising of all.

Ms Luk remains wary of markets in South-east Asia (barring Singapore), believing that Philippines, Indonesia and Thailand have too many political problems at present, which makes their risk hard to evaluate.

She also sees real benefits to the Chinese infrastructure projects. Crucially, when a road is built in China it actually connects people. When we build or improve a road in the West's saturated transport systems it doesn't necessarily make a big difference. In China it is transformational.

She believes that China will see around nine per cent economic growth going forward. The credit crunch has, in many respects, come at a wonderful time for China; it has given the authorities even more incentive to move from an export focus to encouraging domestic consumption.

Ms Luk believes there is still more potential growth to come in 2010. While she had one of the most awful years of her professional life in 2008 she has brought the fund back strongly. In my view her relatively aggressive approach dovetails quite nicely with the more cautious strategies of other quality Asian funds such as those from Aberdeen and First State.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

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