Why you should buy China and quality financials

Professional investor Rupert Foster believes that there are some interesting opportunities to be found in Asia and in financials. Here, he picks four of his favourites from China and elsewhere in the world.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Rupert Foster, investment manager at Matrix Alternative Investment Management

The mantra in Asian investment circles for many years has been that the Chinese authorities would never allow anything to upset the stockmarket before the end of the Olympics. Well, the stockmarket fell 55% in the nine months before the games, then 10% over the first two days.

A contrarian might say that the end of the Olympics will be a buying opportunity. But the fundamentals do not support this. I certainly expect Asian stocks to rise in the long term, but for the next six to 12 months they will fall, allowing investors to buy up some very cheap, high-quality, multi-year growth stocks. So far in Asian markets, and in particular the two erstwhile darlings China and India, we have seen the unwinding of extravagant earnings multiples, but no real earnings downgrades either from companies or analysts. These will appear over the next six months, and will be felt hardest in the darlings.

Another mantra has been that China's authorities will be able to run their economy at a minimum 8% growth a year. With the collapse in exports from China this year and slowing domestic consumption (as shown best by the fall in air travel, rather than the official numbers), 8% GDP growth is close to impossible. An annualised rate of about 6% seems more likely by 2009's first quarter. The best ways to profit from this disappointment is through shorting the Hang Seng or any China-related index or exchange-traded fund (ETF). The damage will be felt most in Chinese banks, property and higher-end consumption names, such as Ports Design. These have so far looked defensive, but won't be as consumption really starts to slow fast.

The classic buy signal for Chinese and Indian markets would be magazine covers calling the end of the Chinese and Indian growth story. Yet there are still interesting opportunities across Asia. Many of these are in defensive areas where earnings upgrades will not be the story, but higher multiples will. Genuine defensive stories, such as China Yurun (HK:1068), will see their multiples grow to around 30 times as the rest of the market sees ongoing downgrades. China Yurun is China's leading slaughterhouse, meat distributor and branded meat manufacturer. It has just a 3% share of the slaughterhouse market, but has the best network of modern slaughterhouses and chilled logistics able to provide chilled meat to the burgeoning supermarket trade. This is a business that will grow steadily through rocky market conditions.

Elsewhere in the world I am looking at finance-related stocks with long-term quality franchises that have been sold down aggressively, including listed asset managers such as New Star Asset Management (LSE:NSAM) and Aberdeen Asset Management (LSE:ADN). They now trade at multiples of funds under management unseen for a decade or so. If earnings do not pick up, consolidation is likely to start here much earlier than in the banking sector. I would also add Cattles (LSE:CTT) to this list. The management team has gone through many cycles and its model is holding true this time the newer players, the credit-card issuers and sub-prime mortgage players, will exit, leaving the way clear once again for the specialists.

Recommended

Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Three fast-growing, undervalued UK mid-cap stocks to buy now
Share tips

Three fast-growing, undervalued UK mid-cap stocks to buy now

Professional investor Katen Patel of the JPMorgan Mid Cap Investment Trust picks three fast-growing UK mid-cap stocks to buy now.
18 May 2022
Should you buy Vodafone shares, or steer clear?
Share tips

Should you buy Vodafone shares, or steer clear?

Vodafone grew revenue by 4% and profit by 11% last year, and offers investors a 6.4% dividend yield. So should you buy Vodafone shares? Rupert Hargrea…
17 May 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
Value is starting to emerge in the markets
Investment strategy

Value is starting to emerge in the markets

If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy tra…
16 May 2022