China Stocks Are Lombard Odier Manager’s Big Call for 2017

(Bloomberg) -- Chinese stocks have the largest allocation in Didier Rabattu’s emerging-markets fund, and the Lombard Odier Group head of equities is adding more in 2017.

“It is a big call for us this year,” Rabattu said in a Jan. 31 interview in Dubai. He is increasing his $750 million Emerging High Conviction fund’s 35 percent weighting of Chinese assets to 40 percent, including A shares and stocks traded in Hong Kong and the U.S., to gain from valuations he says are cheap relative to other emerging markets.

The fund has outperformed 60 percent of 3,184 emerging market equity funds tracked by Bloomberg in the past three months. Its current allocations are overweight on China by 10 percentage points compared with weightings in the MSCI Emerging Markets Index, which has gained 6.3 percent this year. Rabattu said key to his approach is seeking out private companies focused on consumer-facing businesses that have a record of stable returns, low debt and aren’t dependent on natural resources.

Here are some of his views on five key emerging markets in 2017:

• China: increasing total exposure in the short term.
  Alibaba Group Holding Ltd. is the biggest stock in the fund at 4.2 percent, followed by noodle manufacturer Tingyi Cayman Islands Holding Corp.
• Nigeria: “We know that the currency has devalued by 25 percent last year. There is 20 percent more to come. Once we know that the currency has devalued, we will be able to sell our position and get our cash back, which we can’t at the moment.”
• Turkey: “Deteriorated massively in the past few years.” President Recep Tayyip Erdogan’s rule is having a negative impact. Likes washing machine manufacturer Arcelik AS as a stock, because of 70 percent of revenue coming from outside of Turkey.
• South Africa: Economy deteriorating rapidly on President Jacob Zuma’s watch.
• Philippines: President Rodrigo Duterte has prompted a change. “When you look at what he says and what he did, you have to be very suspicious. So we decided to cut our exposure to zero.” Country was the best emerging market in the past five years. “Valuations were already expensive, his election was a catalyst.”

To contact the reporters on this story: Filipe Pacheco in Dubai at fpacheco4@bloomberg.net, Dana El Baltaji in Dubai at delbaltaji@bloomberg.net, Justin Carrigan in London at jcarrigan@bloomberg.net. To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen