Increasing your exposure to Chinese stocks is worth the risk.
That’s the view of Caroline Kai, CEO of US-based Pzena Investment Management. “This is really the first time in the last seven, eight years where we feel like you’re getting paid to expose yourself to China,” Cai told “CNBC Squawk Box Asia” this week.
The investment firm has increased its exposure to Chinese equities over the past two years. For Cai, the opportunities in China are exciting.
“It’s not because we’re particularly bullish on the long-term Chinese macro, we think things are quite challenging. What we’ve been drawn to is the extreme value we’re seeing in China. are, where people are basically saying there is no price you can get me to invest in China,” he said.
“We think, if the risk is obvious to everyone, at least you’re getting paid to take some exposure,” he added.
Others have noted a more cautious approach. In early October, Winthrop Capital Management’s Adam Koons told CNBC’s “Street Signs Asia” that he was waiting “a little bit longer” before re-entering the Chinese market, citing possible short-term volatility in the stock market. They have concerns about change.
China has announced various measures in recent months aimed at boosting its sluggish economic growth. In September, the People’s Bank of China announced a slate of measures such as reducing the amount of cash held by banks.
An investor reacts to a stock index at a securities company on May 30, 2007 in Shanghai, China.
Photos of China | Getty Images News | Getty Images
Just days later, China’s top leaders said they wanted to stop the decline in the property sector, saying it needed to stop its decline and encourage recovery.
More recently, China on Friday announced a five-year package totaling 10 trillion yuan ($1.4 trillion) to tackle local government debt problems, while signaling more economic aid to come next year.
Chinese stocks have jumped since late September on promises and stimulus announcements, with the CSI 300 index up 20 percent year-to-date.
Japan
Despite financial and political uncertainty, Japan has also been popular with global funds this year. Prime Minister Shigeru Ishiba was re-elected on Monday despite his ruling Liberal Democratic Party (LDP) suffering its worst election defeat in more than a decade last month.
For Cai, the “small cap end” is of particular interest compared to Pzena’s “limited exposure” to more capitalized firms like banks.
“We think about prices. [for large-caps] are not really justified by fundamental principles,” he said.
“You look at Japanese banks, for example, they generate low ROE. [return on equity] than European banks — but they trade at higher multiples than European banks,” Cai said.
“A lot of what could go right has already been priced in,” he said, adding that Japanese interest rates could rise by 50-100 basis points.
“On the other hand, if you look at what’s happened to small-cap Japanese companies, in theory, those are the ones where changes, improvements in corporate governance and improvements in the domestic economy could have the biggest impact on long-term results.”
—CNBC’s Sophie Kaderlin and Evelyn Cheng contributed to this article.
