The long-term potential of the Chinese market far outweighs the short-term opportunities created by Japan, according to Franklin Templeton’s Philippe Brugére-Trélat.
Brugére-Trélat (pictured), who co-manages the $1.1 billion Franklin Mutual Global Discovery fund, said he has repositioned the global equity fund to have a greater focus on China.
In his latest market update, Brugére-Trélat said he had ignored recent panic over the much-heralded Chinese slowdown in growth and opened a 1.93% off-benchmark position here.
‘We believe reforms are important in potentially lifting valuations, but – unlike some frightened investors over the past few weeks – we also understand that it will likely take time before such changes bear fruit in the economy and in the re-rating of stocks.’Brugére-Trélat and his team have located opportunities in areas likely to benefit from the reform movements in China. He has pinpointed highly cyclical areas linked to middle class consumption growth.
‘One area we like is autos, particularly companies running dealerships,’ he said. ‘We have been attracted to the large potential of service revenues and nascent used car market, both of which provider higher margins than new vehicle sales.’
In addition, Brugére-Trélat said his team have looked at the growth of advertising, as well as opportunities created in the insurance sector created by the deregulation of interest rates.
Not going for Japan
Brugére-Trélat said the decision to invest in China had been an almost direct response to the trio’s aversion to the short-term attraction presented by the Japanese equity market.
‘We believe the recent rally in Japan’s equity markets has been largely driven by increased liquidity and a weaker Japanese yen. In other words, we have seen a massive re-rating of the market with relatively little fundamental change in the earnings outlook on a company-by-company basis.’
In direct comparison to China, Brugére-Trélat said Japanese equities did not pose compelling enough valuations to justify a significant weighting to the country.
The Franklin Mutual Global Discovery fund has returned 56.5% over the five years to the end of July 2013. This compares to a rise of 47.5% by its benchmark, the FTSE World TR EUR, over the same period.