An investment chief overseeing $3.2 billion shares his 4 essential strategies for investing in China — including his top 3 stock picks

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  • Rathbones’ David Coombs is head of multi-asset investing, overseeing $3.2 billion in assets.
  • Coombs sees Chinese government debt as a safe-haven asset, explaining how he uses it.
  • He breaks down the 4 strategies he uses to invest in Chinese markets, and 3 stocks he’s betting on.
  • See more stories on Insider’s business page.

For willing investors, Chinese markets are full of opportunity with skyrocketing technology companies like Alibaba and Tencent in the mix.

Since 1978, Chinese markets have slowly opened to foreign investors. But market players are coming to terms with the very unique climate they face, namely, the ever-present state. This means strategies must be used over a scattergun approach.

Even the hottest names are not immune from the pressure. For example, Ant Group, the Chinese fintech the billionaire Jack Ma runs, had its initial public offering abruptly cancelled days before its planned flotation after state officials derailed the process. This was a stark reminder to several big Western investors of the crippling power the Chinese government still has.

Despite political risks, investors are still looking to Chinese markets for big opportunities. David Coombs, the head of multi-asset strategy who oversees $3.2 billion in assets under management for UK-based firm Rathbones, revealed to Insider his four essential strategies for investing in China.

Safer securities

An easy way to play it safe in China is to buy the big tech names via the Hong Kong exchange. Thanks to the city’s largely westernized financial system, this is cheap and easy to do.

For stocks that fit this approach, Coombs looks for companies with good governance records, even by Western standards. His funds currently hold three stocks through Hong Kong:

  • AIA Group, a life insurance and securities company
    • Ticker: HKG: 1299
    • Market cap: $147.87 billion

AIA Group share price
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  • Tencent, a multinational technology conglomerate holding company. It’s subsidiaries include Riot Games and Tencent Music
    • Ticker: HKG: 0700
    • Market cap: $806.24 billion

Tencent share price
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  • Travel Sky, online airline ticketing service

TravelSky Technologies share price
Markets Insider

A new safe haven?

China’s equity markets aren’t the only thing Coombs is betting on. He’s also taken positions in Chinese government bonds.

Massive central bank buying programs and the subsequent low-yield environment have forced many investors to look outside of the G10 economies for higher-yielding debt. And with the Chinese 10-year bond yielding a coupon of around 3.21%, it’s looking attractive, especially compared to the US 10-year Treasury’s 1.69%.

But, Coombs’ bet on Chinese government debt is about more than just yield. To him, it has become a “safe haven asset”.

“That’s quite controversial, but in terms of the power of their economy and the backing that those bonds have and the currency, we see as a potential alternative to the US,” he told Insider.

Coombs’ portfolio has taken a 1.5% position in Chinese government bonds, he said, adding that US Treasury exposure remains higher.

For something to be a ‘safe-haven asset’, it maintain its value, appreciate, or otherwise outperform when financial markets crumble. In that sense, Coombs says that he doesn’t mind if he loses money on the bet, arguing that this will be a boost for Chinese equities as well as global equities.

Comparing to gilts, the UK’s government debt, Coombs called it “portfolio insurance.”

“We kind of hope we do lose money on it actually, because if we do it means global growth is strong. It’s a profit diversifying asset in our view,” he said.

Stock lending

Many investors are looking for exposure to Chinese markets right now, but not everyone is going long. Some investors are looking to short Chinese stocks and market players can cash in on this by lending their stock.

When a stock is loaned, the title and ownership are transferred to the borrower for a fee. This allows investment banks and hedge funds to borrow the security and make gains over misplaced pricing.

For the security owners, it’s a way of boosting income alongside any returns the stock might bring.

“We bought a structured product on the Chinese mid-cap index, where we are lending the stock for a 10% annual return for traders in that market,” Coombs said.

“It’s only in our high-risk funds, but basically we get the index plus 10%. It’s 500 stocks and there’ll be cr*p in there, absolutely, but basically we get a 10% return based on some stock lending,” he added.

Trust local

One of the biggest barriers to emerging markets is often the cultural differences, leaving Western investors in the cold as they look for companies that will capture the imaginations of the domestic population.

“There’s a few mega caps that one might feel comfortable buying from London, but to be honest, just sit and say ‘we’re going to find the best Japanese or Chinese companies ourselves’, frankly we’re kidding ourselves,” Coombs said, adding that you need to understand the culture.

His solution: delegate the stockpicking responsibilities to a local player.

In Rathbones’ case, this solution has come in the form of the aptly named, China Asset Management Company, a boutique firm based in Hong Kong and China. And with full transparency over the portfolio, this is one of the “very niche areas” Coombs said he felt comfortable outsourcing.