Evergrande spooked investors but one fund manager says it's a 'good time' to invest in Chinese stocks
Fears that Evergrande's debt crisis could spill into China's property sector and beyond have spooked investors — but one fund manager is still bullish on China and has kept his money in the real estate sector. Mashreq Capital has maintained exposure to China's property sector through investment grade bonds in Country Garden and Shimao , said its head of fixed income and global portfolios, Oliver Kettlewell. Country Garden, headquartered in Guangdong, is among the biggest real estate developers in China and builds residential and commercial properties across China, Malaysia and Australia. Shimao Group develops and manages properties ranging from residential and office buildings, to hotels and theme park operations. "The only area that we're shying away from still is China high-yield property bonds because I think we're going to see some contagion there, particularly with single big China high-yield property names," Kettlewell told CNBC's "Capital Connection" on Thursday. High-yield bonds — also known as "junk bonds" — are at greater risk of default, hence they pay higher yields than investment-grade bonds to compensate investors. Evergrande is on the brink of collapse after racking up more than $300 billion of debt. The world's most indebted developer warned investors twice this month it could default on its payments, fueling fears of a fallout that could spark a wider contagion. But Kettlewell said Evergrande's debt troubles will not likely be systemic. "Short-term contagion into other sectors could continue," he said. "But we believe Evergrande's relatively small size compared to the Chinese economy should result in limited long-term impact into other sectors." The developer's debt of $300 billion is approximately 2% of China's $14.7 trillion gross domestic product and other investors have pointed out that it has the potential to spill over into other parts of the economy. Why Mashreq Capital sold off Evergrande Kettlewell said that in May this year, Mashreq Capital exited its entire position in Evergrande's dollar-denominated bond due to mature in June 2025, when it was trading at around 80 cents. The bond is now trading at around 27 cents. "The reason why we sold the position back then is because Evergrande was not making sufficient progress on their deleveraging plan," he told CNBC. "As we all know now, they have a lot of non-core, non-property businesses such as electric vehicle units, theme park for kids, football club, health-care business — and they weren't really monetizing these businesses quick enough for our liking." Additionally, the asset manager flagged concerns over a conflict of interest. Chinese officials reportedly launched an investigation into Evergrande's relationship with Shengjing Bank , after allegations that the bank loaned billions to Evergrande. The real estate giant owns a stake in Shengjing Bank. Outlook for Evergrande and China stocks Kettlewell said he believes the Chinese government will try to step in to ensure that people who have bought properties from Evergrande will somehow get their properties, perhaps through another developer stepping in. "We think eventually they are likely to default," he said referring to Evergrande. "Whether it's technically through not paying with the coupon or otherwise." Evergrande has $699 million in coupon payments due by the end of the year. Last Thursday, a $83 million interest payment for one of its dollar bonds was due — investors are still in limbo after the payment deadline lapsed . Another $47.5 million of interest is due on Wednesday. Evergrande has a 30-day grace period to make the payments. Overall, Kettlewell still sees a lot of upside in China, and said China stocks are "trading at a much better discount in terms of P/E relative to developed markets." He was referring to the price-earnings ratio, a metric investors use to value a stock and determine if it's overpriced or not. "We think that this is still a very good time to be invested in Chinese equities," Kettlewell said. "Elsewhere in terms of contagion outside of Evergrande, we're maintaining our position in Chinese equities via China ETFs," he added.
Aerial photo of intercontinental Shimao pit hotel in Shanghai in golden autumn season, surrounded by fields and fields, with golden paddy fields, Shanghai, China, October 11, 2020.
Costfoto | Barcroft Media | Getty Images
Fears that Evergrande's debt crisis could spill into China's property sector and beyond have spooked investors — but one fund manager is still bullish on China and has kept his money in the real estate sector.