Romina Graiver

Recently in Australia to promote William Blair’s Unit Trusts, launched last year, William Blair’s International and Global Equity Specialist, Romina Graiver, said the Chicago-based asset manager’s views of the China market have significantly changed over the past six months, following new leadership focused on avoiding a hard landing of the economy while switching from an infrastructure-oriented to a consumer-oriented model.

“The Government is taking the initiative to transform the previous pattern of economic development in China, which proved successful in the past, but poses risks for the future. They are implementing significant structural reforms in many areas among which is the key financial sector reform. We have seen the opening of the stock market with the launch of the Shanghai-Hong Kong Market Connect, which allows mainland Chinese investors to access the offshore market and foreigners to invest in the domestic Chinese market. A program that allows banks to swap short-term loans with long-term bonds and municipal bonds has been put in place, and that is going to be expanded,” Ms Graiver said.

It’s an approach that seems to be working – China has been the strongest performing market over the past year, with index returns ranging from 50-125%, far outpacing global equity market returns.

Ms Graiver said a two level strategy is in play. “One is turn off infrastructure, two is turn on consumer. We look for high-quality growth companies that can demonstrate high returns and quality products and services and some are in areas described by China as an area of priority.”

‘Made in China 2025’, she said, now includes IT, environment protection, aerospace and aviation, railroads etc.

“It’s about urbanization, communication and improvement in areas that matter. We look at China from a real bottom-up, stock picking market perspective and we find some interesting opportunities there. China is really leading the way in many areas. If you look at many IT companies/internet companies, you can see similar companies in the US using the model that China made in gaming/social media.”

Ms Graiver said China is moving away from the negative connotations associated with being a cheap producer and is moving up in the value added chain, producing much higher quality products.

“We don’t believe that this will stop any time soon,” Ms Graiver said. “This has to materialize in better companies turning out better products and profits. There is a lot of liquidity there to continue to support the Chinese market expansion. China is the big engine for Asia and the rest of the world, so clearly it being in good shape is good for everyone.”

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Romina Graiver

Recently in Australia to promote William Blair’s Unit Trusts, launched earlier this year, William Blair’s International and Global Equity Specialist, Romina Graiver, said the Chicago-based asset manager uncovers many quality opportunities in emerging markets.

“Investors know about the growth story in emerging markets however we believe in many cases they underestimate the quality aspect of it,” she said. “Sustained high level of economic growth has enabled many emerging markets companies to generate consistently higher returns on assets and capital. We also acknowledge that some areas and macro events have provided a tailwind effect for companies to do better as they benefit from an economy that is growing, rather than contracting, which is where we are seeing that there is a bit of de-coupling.”

Finding high quality growth companies in emerging markets is Chicago-based global asset manager William Blair’s driving theme with approximately a third of their 2500 global quality growth investment universe made up of emerging markets companies.

Ms Graiver said some emerging markets companies within William Blair’s Emerging Leaders strategy also belong to the Global Leaders strategy, which demonstrates that these companies can be among the highest quality on a global scope.  “We use the same process, research and analysis for companies in both portfolios but it is tougher for an emerging market company to get into the Global Leaders strategy because of the broader opportunity set,” Ms Gravier said.

“William Blair looks at the top down views, but at the end of the day, we use bottom up fundamental analysis to find quality growth companies with strong governance. We are not going to play a theme if we are not finding the best quality growth companies in that theme,” Ms Graiver said. “In emerging markets we like countries where we see tailwinds for companies to do even better, for example countries where we see opportunities for reform, rather than countries where the macro trends are a headwind for companies.”

“We like India and Indonesia for instance,” Ms Graiver said.  “In India we increased our exposure well before the elections. India is a market where we often find very high quality companies with very strong management – like IT services and pharmaceuticals. Early this year we increased our exposure to more cyclical names, which are expected to benefit from an improvement in the domestic economy. We also like auto-related companies in India, some of which are benefiting from car demand recovery and improved sentiment.”

Ms Graiver said William Blair saw a real growth opportunity for India with the likelihood of the Modi pro-growth government coming to power, which would provide a better framework for these quality companies.

“We looked at Modi’s previous work as a provincial Governor and how this boosted GDP growth and in his work fighting corruption and bureaucracy along with feedback from companies who had different activities in different regions.  The standard of living in Modi’s Gunjarat province was much higher than other regions of India.”

William Blair has increased exposure slightly in Indonesia, Ms Graiver said, where there are some high quality companies and again there is likelihood for reform with a new government. William Blair has also increased to an overweight position in Mexico due to the clear intention for structural change and also the benefits of proximity to the United States as a trading partner.

Ms Graiver said in contrast to the above, Brazil, which is struggling with slow growth, high inflation and a current account deficit, does not look compelling from a top down perspective. There are, however, some very attractive  companies with strong operating performance and growth prospects. “Despite the weak macro environment, some companies are benefiting from secular growth drivers, such as evolving consumption patterns driven by social demographic changes; others are supported by government policies  like in  the education space” Ms Graiver said.

In China, William Blair is underweight, however, less than before. Ms Graiver said William Blair sees some optimism regarding recent data reports, helped by mini or targeted stimulus measures however, they see a long term deceleration of economic activity. “China is going through a big deleveraging process which will reduce GDP growth,” she said.  “The government seems committed to reform and is moving forward in many areas (financial reform, SOEs, etc) but at the same time they have to manage the gradual transition from high-leveraged and investment driven economy to a more consumer driven economy. There may be some pain along the way however there are areas in China that are seeing favourable growth trends and the market is attractive from a valuation perspective compared to other markets and compared to its own history.”

In the end it is William Blair’s ability to select quality stories in their universe of emerging markets which benefit from the tailwind of prospects and growth at a macro level which is an additional driver of performance.

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