LONDON, April 21 (Reuters) - ** Henderson China Opportunities Fund manager Charlie Awdry buys back into Chinese banks after 18 months as a better-than-expected corporate profitability eases worries over bad debts
** “We have had a change of heart in a sector that’s pretty controversial,” says Awdry
** ”Chinese credits as a whole are slightly better quality than the market is believing. “If the cycle follows, those non-performing loans may well have peaked,” he says.
** China Construction Bank now in fund’s top ten holdings. Also bought Bank of China
** Sees economic cycle in China as more robust than expected. Corporates experiencing a positive profit and cashflow cycle, with improving outlook for profit growth
** Quality of banks’ balance sheets therefore likely to be better
** Awdry points to more discipline in corporates’ capital allocation, and increasing dividends, particularly in energy sector with coal company Shenhua recently setting a special dividend
** At the same time, growth stocks “getting pretty punchy in valuations” - internet company Tencent trades on 34 times 2017 P/E.
** “At some point we have to think how much potential for upside surprises is there in growth, and how much is there in value stocks”
** Fund is not overweight Chinese financials as a whole
** “There’s a lot of icebergs floating around in the Chinese financial sector, and as a result you want to be in the ones which have biggest returns”
** To make way for bank stocks, fund lightened allocation in some tech stocks including ASM Pacific, healthcare stocks including Jiangsu Hengrui and CSPC Pharma