Vontobel cuts China stock holdings to chase growth elsewhere

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Vontobel Asset Management is reducing holdings in Chinese stocks to free up cash for more attractive picks in countries like Brazil, India and Mexico.

The Zurich-based money manager with $2.2 billion deployed in emerging markets has moved from overweight to a deeply underweight stance on Chinese equities and is reallocating capital mainly to these three countries, strategist Ramiz Chelat said. These markets offer something what China increasingly lacks: companies with earnings and margin growth.

The moves come as equity analysts have cut their forecasts for profits at China’s mainland companies by 1.1% this year, after reducing them by 5% in the second half of 2023. A slowdown in the world’s second-biggest economy, a ballooning property crisis and geopolitical tensions with the West have all helped erode investor sentiment. A $728 billion stimulus announced last week only had a short-term impact, with mainland stocks resuming losses and posting the biggest three-day declines since October.

“We are taking some of the capital we used to allocate to China and reallocating to Brazil, Mexico and India,” Chelat said. “These countries offer a selection of attractive growth companies which are getting earnings upgrades. In China, we are seeing the reverse: consistent downgrades.”

Vontobel has curbed shares from China and Hong Kong to 19% of its emerging-market portfolio from 36% a year ago, Chelat said. That marks a 745 basis-point underweight position relative to the benchmark index, reversing a 338 basis-point overweight, he said.

Partly owing to its previously heavy China position, the Vontobel Emerging Markets Equity Fund posted a 2.5% gain in 2023, compared with a 7% advance for the MSCI Emerging Markets Index. Those returns were in the 22nd percentile of its peer group. In the past three months the relative performance has improved to the 55th percentile, according to data compiled by Bloomberg.

Skepticism over Chinese assets is spreading beyond stocks, with investors looking past the low yields on their government bonds to more attractively priced debt in a year when the Federal Reserve’s dovish pivot is set to buoy emerging markets. Higher-yielding markets will have more room to gain from the anticipated rate cuts is the theory, while South Korea and India’s potential inclusion into major global bond indexes should give their assets an added boost.

Selective Exposure
Besides slower growth and weakening sentiment in the property sector, China also has an overcapacity problem in its industries, which acts as a drag on earnings outlooks, according to Chelat. Vontobel has turned selective, buying only companies that offer earnings growth, he said.

China has continued to underperform emerging-market peers this year, with the gauge of mainland stocks falling more than 5% in January and Hong Kong-listed equities plunging about 8%. The wider benchmark for emerging-market stocks is posting a nascent rebound after a three-week selloff that saw $1.1 trillion of investor wealth erased.

Vontobel is especially bullish on Brazilian stocks and has doubled its exposure to the country over the last 12 months. The fund house has invested in Raia Drogasil SA, betting that the drug-store chain has enough growth visibility to double its market share to 30% within the next 10 years.

“The company has the best logistics network in its class and is a defensive-sector bet as Brazil has an aging population. But it is also a growth company as it is successfully transitioning to an e-commerce model,” he said.

Meanwhile, Chelat has increased his stock holdings in India, which briefly became the world’s fourth-largest market last week, toppling Hong Kong. Vontobel owns Max Healthcare Institute Ltd., which is on an expansion drive, and Eicher Motors Ltd., which benefits from growing consumer demand in the country.

In Mexico, Vontobel’s preferred holdings include Fomento Economico Mexicano and Wal-Mart de Mexico.

Chelat’s fund has also bought Totvs SA, an enterprise-resource-planning software company that serves small and medium-sized companies. Its level of customization for Brazilian companies puts it ahead of global competitors, he said. Meanwhile, the coming monetary-easing cycle may also throw up opportunities to buy banks, he said.

“We are looking for bottoms-up stock picks driven by a deep pool of high quality businesses and very strong market positions,” Chelat said. “These countries offer that. But in China, there’s overcapacity which really concerns me.”