An Asian hedge fund that trounced peers by shorting China-related shares during a market rout last year is still bearish on Asia’s biggest economy, while seeing the region’s best opportunities in Vietnam and the Philippines.
Deng Jiewen, whose $65 million FengHe Asia Fund surged 20 percent in the past year as Asian stocks tumbled, said in an interview from Singapore that Southeast Asian economies are doing a better job than China in boosting domestic consumption and attracting foreign investment. Chinese stocks face a difficult road ahead because of deteriorating earnings, Deng said.
FengHe, which means "risk and return" in Mandarin, is among a handful of hedge funds capitalizing on investments in Asia’s smaller markets as the outlook for China has soured. John Foo, who runs Singapore-based hedge fund firm Kingsmead Asset Management, last year called Vietnam the “brightest star in a dark night” in Southeast Asia.
“We remain quite positive about the Vietnamese economy and corporate earnings growth,” FengHe’s Deng said. “The Philippines has a strong demographic and economic structure. The country is becoming more friendly to foreign capital now.”
The Vietnamese government’s targeted growth of 6.7 percent in 2016 will be among the world’s fastest, girded by rising domestic demand and foreign investment. Overseas investors added a net $100 million to their Vietnam stock holdings in 2015, the 10th straight year of inflows, while other Asian markets suffered outflows. In the Philippines, foreign direct investment jumped 16.4 percent in November to $464 million, bringing the total for the first 11 months to $5.5 billion, according to central bank data.
In the year ended January, FengHe ranked in the top 2 percent of the 188 Asia ex-Japan funds tracked by data provider Eurekahedge Pte. The fund wasn’t immune to losses earlier this year as global equities tumbled amid commodity-price declines, currency volatility and credit-rating downgrades. The fund lost 3.8 percent in January, as the MSCI Asia Pacific Index tumbled 8 percent to a three-year low.
The FengHe fund is run by F&H Fund Management, an asset manager co-founded by John Wu, the former chief technology officer of Chinese e-commerce company Alibaba Group Holding Ltd. The fund favors sectors that have strong long-term fundamentals such as tourism, new energy vehicles, health care and consumer in Asian markets.
Vietnam’s VN-Index trades at 1.7 times net assets, near its lowest level in three years, after falling 1.5 percent in 2016. The gauge climbed for each of the past four years. Earnings on the Philippine Stock Exchange Index are projected to gain 22 percent over the next 12 months, according to estimates compiled by Bloomberg, while the measure is little changed for the year.
Chinese equities have extended declines this year, with the Shanghai Composite Index plunging to a 14-month low on January 28 amid signs the nation’s economic slowdown is deepening. Companies in the benchmark gauge will probably grow earnings at 3 percent on average this year, Morgan Stanley said last month, cutting its estimate from 5 percent.
“Most investors recognize the valuation in the market has become cheaper,” Deng said, referring to China stocks. “Having said that, earnings growth has also deteriorated for a majority of the sectors," and some companies might even see profits drop this year, he said.
Chinese authorities raised margin requirements on futures contracts, compelled brokerages to pare back stock lending and started police investigations against “malicious” short sellers.
Deng pared his holdings in Chinese companies prior to June, when the stock market starting tumbling amid concern the nation’s soaring levels of margin debt were unsustainable. The fund also shorted Chinese shares in Hong Kong last year. The Shanghai Composite and the Hang Seng China Enterprises Index have both tumbled more than 40 percent from their peaks last year.