Turnbull manages China-focussed funds such as Neptune China Fund, Neptune Greater China Income Fund, Neptune China Special Situations Fund, while he is also an assistant manager on Neptune’s global fund range.
Turnbull joined the asset management company in January 2007 as an investment analyst. He was appointed head of Chinese equities in 2012 and investment director in April.
In an interview to Last Word Media, he shares his insights on range of topics right from the sustainability of the growth model to the merits of investing in the mainland.
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Growth sustainability
"What has driven economic growth in China in past decade is investments and consumption domestically. We feel Chinese growth is actually fairly well insulated from what goes on the rest of the world, we feel they can comfortably achieve 7-7.5% growth with zero contribution from net exports."
He expects "positive upside surprise for China to come from net exports" as the fund house has "pretty bullish views on prospects of US, especially the private sector and European economies,” which in turn can work in favour of China.
“In the long-term, China’s growth would gradually slow down, as you cannot keep adding more and more exponentially on the base. But, that should not be a cause for great concern, as regardless of anything happening elsewhere, it is becoming more of sustainable growth.”
He expects growth to be around 7-7.5% next year, and then gradually taper down.
The International Monetary Fund recently estimated China’s economy to expand 7.6% in 2013, followed by 7.3% next year.
Reforms
According to Turnbull, the only way China can re-accelerate growth would to exacerbate the long-term challenges, which he feels the government is showing "reasonable amount of willingness and ability to do it."
"On the demand side, it is about having more consumption relative to investment. On the supply side, it is about making corporate China more efficient and productive. How would you get growth of 9%, you cannot stimulate consumption that much. You might get some benefit from net exports."
Chinese government will unveil priorities for reforming economic policy for the next decade at the third plenum of the Communist Party’s 18th National Congress to be held during 9-12 November.
The reform agenda is likely to feature financial and tax reforms, but may also address persistent issues such as hastening urbanization through land reforms and liberalizing China’s household registration system, which restricts migration between rural areas and cities.
"The only way you can really do it is by increasing investment. It is about better investments in industrialization. You will see lot of investment for urbanization, leading to economic opportunity. It is about making these state-owned companies more efficient rather than giving in hands of private investors."
US taper-China gain?
Turnbull foresees the US to start tapering its quantitative easing programme in the late first quarter next year.
"China will look less bad, it will be in fact marginally positive (for China). May be there would be some rotation from emerging markets to China, to limited extent," he said anticipating money to flow from countries such as Indonesia, Thailand, Brazil, and India into China.
Since May when the talks of U.S. quantitative easing tapering started, emerging markets suffered a lot of outflows due to structural issues such as big current-account deficits, porous capital accounts, and lot of debt denominated overseas.
"For once in crisis, China actually came out looking quite good. They have strong current account surplus, closed capital accounts, very adequate domestic liquidity to cover any capital that can leave. Debt is all domestically held and domestically denominated. So, it looks relatively better than others."
Chinese equities
Expecting a range-bound market on a secular three-year basis, Turnbull expects re-rating of Chinese equities.
"We see some re-rating (in Chinese equities) 8 times earnings to around 9.5-10 times next year’s earnings. If I look at consensus EPS growth, I would be looking at 15% earnings growth for the next year for the stocks we hold in China Income fund, which is not an unreasonable amount of growth to expect from the market."
In terms of investing, Turnbull believes in identifying winners and losers emerging from the reform process.
Companies that can benefit from consumption seems interesting to him for investments along with "parts of financials."
“I am bullish on those sectors that are exposed to consumer which can benefit from longer-term reforms. We are not excited by just consumer stocks, in the traditional sense. But, any way in which Chinese consumer has more disposable income and is spending it in new ways such as Internet stocks, where we see opportunity."
He expects select energy, materials, and financials stocks to struggle through the reform process, while he predicts opportunities in mid-caps. Within energy sector, he likes companies operating in gas business rather than oil and oil exploration. He does not see any bubble in Chinese real estate.
"Banks, Telco, energy, insurance companies may struggle through this (reform process) and may find their operations getting a bit tougher. May be small-caps would do better."
On telecom sector, he said, "I think Telcos is a dangerous place to be. The government made it pretty clear they want a more competitive landscape rather than having nearly 70% of the mobiles being operated by China Mobile. How exactly they achieve that over time is very uncertain, but it does mean there is lot of policy risk."
Reflecting broadly these views, , the fund manager has deployed about 29.5% of the Greater China Income Fund’s corpus worth £25.7m in the financials and 14.3% in consumer discretionary stocks as of August-end. The telecommunications and energy sector had 9.4% and 8.4%, weight respectively.
In the China Fund with assets worth £82.1m, financials and consumer discretionary allocation was at 24% and 20.6%, respectively. Telecom holdings accounted for 2% while energy had 11.5% weight.
