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China's stock market tumble no surprise to fund managers

Some welcome breather after fast runup

MUTUAL FUNDS REPORTER

The rout on the Chinese stock market and its ripples around the world prompted a little "I told you so" finger-wagging from some on Bay Street yesterday. There have been plenty of signs a market correction was in the works, clear "sell" signals that many chose to ignore, fund managers agreed.

"Why didn't you sell some [shares] last year after you made 100 per cent?" asked Gavin Graham, chief investment officer at Guardian Group of Funds in Toronto. "If you still have exposure and haven't taken profits, well, I am afraid, my friend, you have been greedy and now you are afraid. That's the way emerging markets work. They are volatile."

The Shanghai composite index plummeted 8.8 per cent yesterday to close at 2.771.79, hurt by speculation that the Chinese government's new austerity measures will slow the nation's sizzling economy. Reaction was fierce. In New York, the Dow Jones industrial average dived more than 416 points. Stock markets in Canada, Europe and Asia also slid on concern that waning demand from China will curb global growth.

Chinese stock prices doubled last year as investors piled into the market in the wake of shareholding reforms.

In Canada, mutual funds with exposure to China have been red hot. The fund asset class Asia-excluding-Japanese equities were up an average of 32.4 per cent for the 12-month period ended Jan. 31. The sector reported net sales of $184-million in January, up 119 per cent from the same period in 2006.

"It was time for a bit of a breather" in the Chinese market, said Patricia Croft, chief economist at money manager Phillips Hager & North Investment Management in Toronto. "It was obviously a very sharp decline in a short period of time . . . but you have to put it in the context of how far the market has run."

The Chinese government has warned investors repeatedly that it won't tolerate market speculation and will curb lending if necessary, Mr. Graham said. "It's apparent they are actually going to do it, and everyone goes whoosh! Money out the door. But we can't all get out the door at the same time, and we're down 9 per cent in one day."

He termed the correction "a stock market event, not an economic event," and foresees strong economic growth as China gears up to host the Olympic Games next year.

"We are relieved this has happened," said Patricia Perez-Coutts, manager of the AGF Emerging Markets Fund. "Some markets have been running too fast, too high. We can't really let that happen, either. You have to stay the course, and check the markets you are in."

Her $324.5-million fund has been taking profits and reducing its exposure to China in recent months. In December, it had a 15-per-cent weighting in the country; today, it has shrunk to about 10.5 per cent. Ms. Perez-Coutts predicts Asian markets will remain volatile for the next two to five weeks. Nevertheless, she said her fund will soon be on the lookout for bargains.

Don Reed, president and chief executive officer of Franklin Templeton Investments Corp. and manager of the Templeton International Stock Fund, is positioning that fund to take advantage of "a change that seems to make people nervous."

As of Dec. 29, the $2.6-billion fund has a 6.5-per-cent weighting in China.

"From our perspective, it is a great buying opportunity," he said. "When a stock is trading lower and the fundamentals are still intact, that stock will be worth more tomorrow than it is today."

*****

Top 10 funds exposed to China

WITH ASSETS GREATER THAN $50-MILLION

Fund% in China1-year return
HSBC Chinese Equity-I44.5%+56.0%
MIX China Opportunities Class31.8+53.7
Fidelity Far East-B27.1+31.2
Fidelity Far East-A27.1+30.8
Templeton BRIC CC23.0+36.1
Fidelity AsiaStar A and B14.3-
National Bank Emerging Markets11.9+24.0
HSBC Chinese Equity-I11.4+56.0
TD Asian Growth9.9+32.9
TD Emerging Markets7.7+26.4

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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