Hedge Fund Sees a `Wonderful, Wonderful' World in China Stocks

(Bloomberg) -- Throw out the idea that emerging markets are a single concept and instead choose places that have political predictability and enough domestic demand to withstand a currency crisis.

That’s the thinking at Algebris Investments (UK) Ltd., a $6.7 billion global hedge fund whose macro credit fund outperformed peers in January. And it’s why China is looking interesting to Ivan Vatchkov, the chief investment officer for Asia in Singapore at Algebris.

For Vatchkov, 38, China has a buffer against global market turmoil thanks to its political cohesion and its tight controls on capital flows.

The macro credit fund returned 2.6 percent in January, according to the firm. That compares with a 0.04 percent decline in a Eurekahedge index that tracks hedge funds employing a similar strategy.

Below are the questions and answers from an interview with Vatchkov this month:

1) What is your view and strategy on China?

• “China is at the end of its leverage journey because the credit intensity is surpassing anything the world has ever seen.” 
• “For us, China’s economic policy, whilst long-term potentially very risky, still has a lot of room to run in defying conventional wisdom on the domestic liquidity front. And because China’s net external funding position is still not that bad -- it has actually repaid a lot of U.S. dollar debt in the last two years, and that’s partly why their reserves are down -- they have actually a little more runway than the bearish consensus thinks.”
• “So whilst we’re by no means structural China bulls, we’re saying the narrative is much more balanced than the simplistic view of ‘China is at the end of the road because by any reasonable metric in history they’ve run out of space to create credit.’ We’re saying that assumption is still not proven. They have for now the political coherence to continue on their present path, as long as there is no social pressure.”

2) Where do you see investment opportunities in China?

• “For now, the interesting opportunities are in equities. Lots of wonderful, wonderful businesses in China and that occasionally are on sale because of the political, economic or market liquidity they have. They have a revenue story that is largely insulated from the things we’re worried about.”

3) What is your view on India?

• From a long-term perspective, India has the demographic growth, the leadership and the sophistication, Vatchkov said. “But for us, two variables need to be in place: opportunity and price. Price is not yet for us. We see interesting things happening. That’s not where we’re spending a huge amount of our time.’’

4) What is your view on Trump?

• “We handle Mr. Trump by not trying to be dogmatic. And we try to look at the specific impact of economic policies and the likelihood of those the market will discount.”
• “Assuming two things happen, which he has alluded to: one is a capex cycle resumption in the U.S. and deregulation. We pass no judgment at this stage on rates and the dollar. Then the only place you got to be is financials. Because there is only one sector that benefits from that unique combination: a pickup in loan growth, deregulation and quite possibly higher rates -- and that’s financial services. Incidentally, that’s possibly one consensus trade that hasn’t reversed yet.’’

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net, Tomoko Yamazaki in Singapore at tyamazaki@bloomberg.net.

To contact the editors responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net, Christopher Anstey, Tomoko Yamazaki