Bullish on China! The CEO of a trillion-dollar asset management giant has spoken out

China Fund News Wu Juanjuan

A few days ago, Hendrik du Toit, founder and CEO of Ninety One, the largest asset management institution in South Africa, said in an exclusive interview with China Fund News that as the world's second largest economy, China has many outstanding companies. Ninety One will maintain its investment capabilities in China and seek partnerships with Chinese institutions.

Talking about Hong Kong, he said that he did not agree with the view of shorting Hong Kong, "The exciting thing about Hong Kong is the talent and the opportunities it has to reach mainland talent, which is underestimated and misunderstood by the world."

According to the data, Ninety One is the largest asset management institution in South Africa, with assets under management of 126 billion pounds (equivalent to 1,134.985 billion yuan) as of March 31, 2024. With an office in Hong Kong, Ninety One has an investment strategy in China.

Here is an excerpt from the reporter's interview with Hendrik du Toit:

China Fund News: Inflation in the U.S. seems to be more stubborn than expected, what does this mean for the U.S. market and emerging markets?

Hendrik du Toit: We've been in the camp of "staying at a higher level for a longer period of time", and the March data proves that, inflation is "easy to come and out". In addition, tariffs and supply-chain-related issues are only bad for inflation, not good. The economy is growing strongly, and the high interest rate environment is likely to stay at higher levels for longer. In 2020, economists surveyed by Bloomberg agreed that the Fed would cut interest rates multiple times in 2023, but they were all wrong.

One needs to build a robust portfolio. When the U.S. sucks money out of global investors, they survive. If this happens, there may be a reluctance to invest in riskier areas, which will have an impact on emerging markets and companies with higher debt, as well as leveraged products, and investors in emerging markets will experience pain. I'm not sure what the impact this will have on growth drivers around the world, but it's relatively certain that money will be more cautious. In this case, investors should choose high-quality stocks. In terms of fixed income, investors should take advantage of the opportunity of higher returns.

China Fund News: You mentioned that economists' predictions about the pace of the Fed's interest rate cuts are wrong, why are everyone wrong?

Hendrik du Toit: Everybody trusts the Fed to make data-driven decisions. The data shows that inflation has fallen significantly. As a result, they expect the Fed to enter the rate cut channel soon.

If we look at the motivations of the main policymakers, there are two very persuasive figures in the history of the Fed: one is Paul Volcker, who is stricter and more resolute than one might expect. He succeeded in bringing inflation down in the United States and laid the groundwork for growth in the golden years that followed. The second is Arthur Burns. As chairman of the Federal Reserve, he prematurely declared victory over inflation and cut interest rates, leading to inflation in the years that followed. Subsequently, the question was thrown to Volcker.

At the moment, Jerome Powell may not want to be Arthur Burns. This is his second term at the Fed, and he wants to leave a good name, so he will be inclined to err on the side of caution.

China Fund News: Where are the risks in the U.S. stock market?

Hendrik du Toit: I'm not as pessimistic as many commentators. Based on the price-to-earnings ratio, they believe that U.S. stocks are too expensive. However, there are also a lot of reasonably priced or even cheap assets in the United States. Globally, while not all economies are booming, there are still plenty of reasonably priced assets. We are not living in 1999, when extreme bubbles were forming. Today, while some sectors or sub-sector indices are expensive, in the U.S. or beyond, it's time to look at reasonably priced assets. This is an era of great promise for active management.

The market is trying to put a price on the potential of AI. There is no unified methodology here, and we may be overestimating the potential of AI. If AI-related companies don't fulfill their promises, prices will fall sharply. Even if the potential is realized or exceeds expectations, the price will not necessarily rise significantly.

Artificial intelligence drives the U.S. stock market. No one could have predicted that AI would become ubiquitous in such a short period of time. I visited OpenAI in June last year. At that time, OpenAI had just become known to the general public, and ChatGPT had just begun to become popular. OpenAI's folks say they didn't know it would attract 100 million users a few months after it opened. If people inside the company don't know, how can an outside analyst know?

Because people have an unusual enthusiasm for artificial intelligence, the Big Seven of the US stock market got an unexpected surprise. However, the market has run so far that the upside potential of many companies has been priced. The flip side of the story is that the lack of demand is not taken into account. Therefore, the risk is asymmetrical. In the U.S., there are a lot of good-quality companies in other areas of the economy that are reasonably valued. Except, of course, those that will fall victim to technological trends.

China Fund News: If the trend of U.S. stocks is driven by extraordinary enthusiasm for artificial intelligence, will the U.S. market be more diversified in the future?

Hendrik du Toit: Based on my 35 years of investment experience, I expect the market to become more fragmented.

That said, I don't think non-US equities, including China, will fix their valuations overnight. Investors will begin to look for value, and capital will flow around the world or between different industries in the United States. However, now that the market has more indices participating, the process of moving from a highly concentrated to a decentralized market will be delayed. In addition, quantitative or AI-driven investment models will also delay this process.

There is no problem with the "Big Seven" (referring to Nvidia, Microsoft, Google's parent company, Apple, Amazon, Tesla, Meta). Nvidia, for example, will undoubtedly remain an industry leader. But without new money coming in, they won't be able to sustain their current valuations. When interest rates remain high, money becomes scarce. When the long-term interest rate is 5%, buying the future and waiting will incur high costs, and cash flow will become attractive. For a long time, companies with low valuations and consistent distribution of dividends to investors have become logically more attractive.

China Fund News: When the cost of capital is high, people seek certainty. Some argue that this is exactly what supports the "Big Seven" because they represent certainty. Unlike the "dot-com bubble" around 2000, they didn't sell you dreams.

Hendrik du Toit: Indeed, they are not selling dreams, and I have no objection to the Big Seven. However, if they disappoint, then their profitability will be frustrated. Once there is a change in external capital, the stock price will be affected. The valuation that people are willing to pay can be affected by the cost of capital, which is not entirely determined by the company.

The "AI passion" is projected on top of these companies, but many have yet to monetize that enthusiasm. If their monetization isn't as successful as we'd like, then the problem arises.

The risk to the "Seven U.S. Stocks" is a marginal issue. I'm not your typical value investor and don't think low valuations are the only way to go. I don't think the stock prices of the "Big Seven" are all bubbles, and their pricing may change marginally. With earnings growth in other sectors in the U.S. or elsewhere in the world, broader opportunities become more attractive. When a highly concentrated market is untenable, people chase a wider range of opportunities.

China Fund News: What do you mean by suggesting that investors pay attention to unpopular assets?

Hendrik du Toit: For example, small and mid-cap companies are overlooked when the market focuses too much on large-cap companies. Another example is the fact that many markets or countries that have not been watched have excellent credit quality for their sovereign and corporate debt. In contrast, in a high-profile market like the United States, there is a lot of leverage in the system. As interest rates rise and the cost of leverage increases, so do risks.

It should be emphasized that, on the one hand, the inflow of funds into the United States is logical, and investors' market preferences for dollar assets are not ridiculous, and on the other hand, when interest rates in the United States fall and the dollar weakens, other assets will begin to become more attractive.

For investors, they should invest in non-US assets before the rate cut, rather than waiting until after the rate cut. At that point, the market has repriced and investors will have to pay a higher price. The fact is that money is flowing in the same direction right now and is showing signs of seeking diversification.

More broadly, the world is becoming more and more gradualized. Given this premise, it is becoming increasingly unfashionable to approach this situation with a single asset and a single product.

In the world of goods, for example, global chains like Starbucks are challenged to offer standard products that are no longer enough, and consumers want products that meet their individual needs. This presents opportunities for companies with regional characteristics.

As asset managers, investors in different regions have very different assumptions about market behavior and risk, and their requirements for investment products and solutions are also quite different. On the one hand, a diverse world gives asset managers the option to look for high-quality companies on a broader scale, and on the other hand, in a diversified world, we also need to provide investors with diversified and personalized investment solutions.

China Fund News: Tell us about your China strategy.

Hendrik du Toit: 60% of our business is in emerging markets and 40% in developed markets, with asset classes spanning global equities, emerging market equities, and debt and credit. We have managed the "All China Strategy", which invests in both onshore and offshore Chinese equities. Many of the investment researchers involved in this strategy are based in Hong Kong, many of whom are mainlanders and have an in-depth understanding of the mainland market.

In recent years, Chinese assets have faced challenges, and global investors' demand for Chinese assets has yet to recover. Despite this, we have retained our ability to invest in China. Because China will produce many excellent companies, and they will become winners in their fields.

We seek to work with large institutions in China, for example, with financial institutions that are committed to selling specialized strategies to their clients. The pandemic has affected the rhythm to a certain extent, but our work has fully resumed. In the coming year, we will have more news about our cooperation with Chinese institutions.

As a South Africa-based institution, we have a strong network in Africa and we can work on the continent with Chinese institutions interested in the region. Retail investors may not be desperate to need such opportunities, however, institutions need opportunities for diversification.

China Fund News: You mentioned that it will take some time for global investors to resume and increase their presence in China. In the process, how do you build China's investment capacity under the premise of keeping costs under control?

Hendrik du Toit: First of all, we have a lot of money invested in China. These funds are deployed in China through emerging market strategies or China-specific strategies, with a total amount of more than $10 billion. We have a strong team, however, we are not over-extended. Importantly, as long-term investors, we want to maintain our investment capacity in China, because we cannot ignore the world's second largest economy, which will hopefully become the world's largest economy in our lifetime.

Why should we preserve our ability to invest in China?

China plays an important role in the global supply chain. Despite the constant noise of geopolitical policies, the supply chains of the world's largest companies cannot be separated from China. During this trip to China, we exchanged ideas with companies doing business in China. These global companies from the West, which are doing well in China, are reluctant to divest from China. Not only that, but they are increasing their investment in China.

In addition, to deal with global issues such as climate, we must rely on all our strength, including China. Despite the political differences in different countries, we must work together to focus on the prosperity of our people. Clean technologies should be rolled out to the whole world, including the African continent, at the lowest possible price, where the people are not so wealthy, if only they had access to cheap solar, wind, and batteries.

China Fund News: At present, where are the customers' concerns about the Chinese market?

Hendrik du Toit: There are two main things that customers focus on:

First of all, geopolitics. Institutional investors, in particular, are concerned about geopolitics, and they are often cautious and often subject to political pressure as they need to go to Congress or similar government functions to explain their investment decisions.

Secondly, policy. Financial institutions face challenges in analyzing the impact of policies. Their training is related to financial analysis and risk management, and they are not good at policy analysis. Once confronted with an unfamiliar variable, they usually choose to discount the asset. Chinese regulators are working to create policy certainty, and they have improved the way they communicate with market players. I'm optimistic about that.

China Fund News: In the past few years, the Hong Kong market has faced challenges. How do you see the outlook for the Hong Kong market?

Hendrik du Toit: I don't agree with those who are shorting Hong Kong. What is exciting about Hong Kong is its talent and its opportunities to reach mainland talent, which is underestimated and misunderstood by the world. The Hong Kong government is vigorously promoting the development of family offices. Hong Kong has US$4 trillion in wealth management and assets under management. Once the animal spirit is released, the energy of Hong Kong will be released.

Now, the environment has changed dramatically, the pandemic is over, and the environment is calmer. As for when global investors will return to Hong Kong, it depends on two factors: China's economic outlook and timing. It will take a little time for investors, though, and I'm already seeing signs of investors returning.

Editor: Huang Mei

Review: Muyu