Hedge fund Prudence shuns China property, likes utilities, consumer

HONG KONG (Nov 2): China's property sector credit will offer fewer opportunities after last year's spectacular gains and investors should switch to consumer-driven plays as the world's second-largest economy turns to consumption from investment as its key driver, hedge fund Prudence Investment Management said.

Sectors such as utilities, resources and consumer goods would provide much more stable cash flows compared with property, where squeezed borrowers were unlikely to feel any significant relief from an expected easing in Beijing's monetary policy, it said.

"I see the property sector as consuming too much resources and not productive enough," said Yuan Wang, who co-founded Hong Kong-based Prudence Investment in 2008.

"Even if credit eases a bit in China, it's not going to benefit the property sector," said Wang, who earlier worked as a scientist at a company in the United States.

Wang's US$250 million (RM782.36 million) China-focused credit hedge fund, Prudence Enhanced Income, has returned 193% since its launch in January 2009 to the end of October 2011.

Last month, it gained 4% to erase its entire year-to-date loss. The fund, which has increased assets from US$30 million at launch, is up 0.16% in 2011.

By comparison, the Eurekahedge Greater China hedge fund index was up about 48% between January 2009 and October 2011. The index is down 8.5% this year.

The fund benefited from investments in the property sector last year, when it produced a 47.8% return. But Wang said the fund had now dumped its entire property sector exposure.

"Probably one or two companies, which look precarious from a cashflow perspective, will go down," the former Deutsche Bank AG private wealth banker said.

He declined to identify the companies, except to say that while most property sector companies were healthy, if one or two firms failed they might pull down the entire sector.

Property is a touchstone issue in the world's second-biggest economy, generating about 10% of China's GDP.

Besides would-be buyers and profit-hungry developers, local governments across the country rely on income from land sales to service debts estimated at 10.7 trillion yuan (RM5.27 trillion) and fund construction of roads, railways and schools.

Its buoyancy has stirred concern that a bubble could be brewing, leading the government to take a variety of steps to rein in house prices since late 2009.

Last week, China's State Council, or cabinet, said it would "unswervingly" maintain property curbs for the rest of the year as it fine-tunes macroeconomic policy.

The comments are significant as they follow those made by Premier Wen Jiabao, who said that while inflation remained the top priority for Beijing, it would also "fine-tune" policy if necessary. Market watchers took his comment to mean the government could begin easing its tough monetary policy in the fourth quarter.

The latest victim of the property curbs was a land auction in Guangzhou that was scrapped on Wednesday, which some reports blame on muted interest from developers.

Wang set up Prudence Investment in 2008 with Chad Liu, a former trader at Deutsche Bank's SABA Principal Strategies, and Philip Wu, former chief executive of Wing Lung Bank.

The hedge fund manages about US$400 million in total, including US$150 million in a long-only product. — Reuters