How to Invest in China Despite Political Risks

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and special guest Juan Torres discussed How to Invest in China Despite Political Risks. Here’s an excerpt from the episode:

Tobias: How do you approach China? Because it looks like there are lots of names that are cheap on a bottoms-up basis there, but like, you just alluded to some pretty real political risk there, how do you think about it?

Juan: So, when we started looking at the main markets in the context of my team, China was quite an expensive market. So, we actually couldn’t find that many ideas. As you probably know and you just made a reference to, it has been coming down quite a bit. So, the screen heat map is populating with China all over the place.

Jake: [laughs] Bright green.

Juan: Yeah, exactly. And so, when that starts to happen, then as a value investor, you go where value is taking you and then we have been spending a lot of our time looking for investment ideas in China. Do we shy away from China because of its geopolitical risk? No, I don’t think so. In the context of emerging markets is very big, it would be us ignoring the entire US. I don’t know, if it’s a like for like comparison, but it’s very big and very meaningful, and so I don’t think that you can do it. Even more if that’s where value is taking you, then again, you do your work and you try to determine and find out whether or not you’re being compensated for those risks.

The risk that you’re going to take, you take any position in that specific market. If it’s a private company, if it’s tech, if it’s an SOE, if it’s a utility, whatever the situation, we just try to be very much aware of the risk that we’re taking and just demand the compensation that we believe that we deserve for taking any particular risk. But that would apply to China or any other market in the context of–

Jake: Yeah, Ted Seides had an article. I don’t know, it must be going on a month ago now, where he was talking about that, every fund manager is facing one question right now, which is basically like, how much should you have allocated to the Magnificent 7? If you choose to have a lot allocated to it, and it does well, like, you’re going to look like a hero. And obviously, if it doesn’t do well and you had a lot allocated, it was obvious how expensive it was. It’s always in hindsight. I actually think there’s probably two important questions facing, especially more of a global allocator right now is, how much of the Magnificent 7 do you want exposure to and probably how much China do you want exposure to? I think those will be pretty big drivers of the next 10 years, if I had to guess.

Juan: Yeah. My co-manager, Vera German in the fund, she keeps telling everyone that would listen to her that the only question that you need to ask yourself in the context of EM is how to get China right. Because at the moment it looks very scary, but sometimes, the investments that you do today are the ones that will provide your returns in the future, because that’s how value works. And so, it feels very uncomfortable to look at China at the moment, but that’s where value is taking you. And so, you just go to where value takes you and try to do your best work at picking the most attractive mispriced situations, understanding that, you might be making some mistakes along the way.

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