Contrarian Equity Manager Says Trump No Threat to China: Q&A

(Bloomberg) -- This time last year, John Malloy defied widespread skepticism to invest in emerging-market stocks. With that bet helping him beat almost all his peers, the Miami-based money manager is now buying China.

His logic? Concern over the threat Donald Trump's policies pose for the world's second-largest economy are exaggerated. Malloy, a co-head of emerging and frontier markets at RWC Partners LLC, says the new president won't risk destabilizing the U.S. economy by taking on Beijing. That would allow Chinese shares to benefit from policy changes aimed at cutting overcapacity.

Malloy has boosted his holdings of Chinese stocks to about 25 percent of his $200 million RWC Global Emerging Markets Fund, from 20 percent nine months ago. Half his top picks are also from the nation. The fund handed investors a 54 percent return in the past 12 months, better than 96 percent of its competitors, according to data compiled by Bloomberg.

Q: What is your positioning on China?

• “We're pretty constructive on China unlike a lot of people in the market. We've been adding companies that are benefiting from the state reforms. The government is cutting overcapacity in steel, coal and cement. And those businesses have been under pressure as the Chinese economy slowed down. Those are the companies we've added to our portfolio.”

Q- What if Trump raises tariffs on China as he had pledged during the campaign?

• “You have to look at what he says and what he does. People had assumed from day one he'd have an adversarial position towards China and it looks like that has changed completely in three months. He is focusing on economic growth policies. Ripping off trade links with China, that is not pro-growth.”

Q: Do you see any likelihood that Trump will force manufacturers to move from China back to the U.S.?

• “It does not happen overnight. How long do you think it will take to make iPhone manufacturing shift out of China to the U.S.? It will take more than four years, which is important, because four years is the presidential-election cycle. Whatever millions of iPhones coming into the U.S. from China is not going to change this year, next year. I don't think it is going to change ever.”

Q- Are there macroeconomic reasons to be bullish on China?

• “The fixed-asset investment part of the economy is stabilizing and doing better. The consumer part of China has always been pretty strong. What has been slow is the heavy machinery, infrastructure, commodity-related businesses and finally after three or four years, that part of the economy has stabilized and started to improve. Chinese growth will probably surprise on the upside this year. I suspect it could be 6.5-7 percent as opposed to 5.5-6 percent which people are saying.”

Q- Which emerging markets do you think will underperform?

• “We have zero exposure in Turkey. In the past year or so, we have completely taken it to zero from 2 to 3 percent of the index in previous years. The direction Erdogan is going clearly is the wrong direction. He is trying to control the central bank, interfering in capital markets, which is obviously a bad sign. There are good companies there and they are trading at reasonable valuations but it is also a country where the currency can be very very weak.”
• “We are underweight on South Africa as well. The government's management of the economy is incredibly poor and they made it very expensive for mining companies to operate there.”

To contact the reporter on this story: Selcuk Gokoluk in London at sgokoluk@bloomberg.net.

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan, Andrew Janes