Increasing exposure to Chinese stocks is worth the risk.
This is the view of Caroline Cai, CEO of Pzena Investment Management Company in the United States. “This is really the first time in the last seven or eight years that we think you’re getting paid for access to China,” Tsai told “CNBC Squawk Box Asia” this week.
The investment firm has increased its exposure to Chinese stocks over the past two years. For Tsai, the opportunities in China are exciting.
“It’s not that we have a particularly positive view on China’s long-term macroeconomics, we think things are quite challenging. What attracts us is the extreme valuations we see in China, where people basically say there’s no way you can do it at this price Attract me to invest in China,” she said.
“Our view is that if the risk is obvious to everyone, then at least you’re getting paid for taking some risk,” she added.
Others pointed to a more cautious approach. In early October, Winthrop Capital Management’s Adam Coons told CNBC’s “Street Signs Asia” that he was waiting “for a while” before re-entering the Chinese market out of concern about a potential short-term reversal in the stock market.
In recent months, China has announced various measures aimed at boosting declining economic growth. In September, the People’s Bank of China announced a series of support measures, such as reducing the amount of cash on hand in banks.
On May 30, 2007, Shanghai, China, an investor’s reaction when checking the stock index at a securities company.
China Photos | Getty Images News | Getty Images
Just days later, China’s top leaders said they were aiming to stem the downturn in the real estate sector, saying it needed to halt the sector’s decline and encourage a recovery.
Most recently, China announced a 10 trillion yuan ($1.4 trillion) five-year plan on Friday to address local government debt, while signaling more economic support next year.
Chinese stocks have surged since late September on promises and announcements of stimulus measures, with the CSI 300 index up 20% year-to-date.
Japan
Japan has also been favored by global funds this year despite currency and political uncertainty. Japanese Prime Minister Shigeru Ishiba was re-elected on Monday despite the ruling Liberal Democratic Party suffering its worst electoral defeat in more than a decade last month.
For Tsai, “small caps” are of particular interest compared to Pzena’s “limited exposure” to higher capitalization companies such as banks.
“We don’t think (large-cap) valuations are really justified by the fundamentals,” she said.
“For example, if you look at Japanese banks, their return on equity is lower compared to European banks, but they trade at a higher multiple compared to European banks,” Cai said.
“A lot of things that could be right are already priced in,” given the assumption that Japanese interest rates could rise by 50-100 basis points, she said.
“On the other hand, if you look at what’s happened to smaller Japanese companies, it’s theoretically those corporate governance changes, improvements and improvements in the domestic economy that could have the biggest impact on long-term results.”
—CNBC’s Sophie Kiderlin and Evelyn Cheng contributed to this article.
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