A Norwegian emerging-market asset manager is finding a risky new trade is paying off: buying sanctioned Chinese stocks from Americans forced to dump them.
(Bloomberg) — A Norwegian emerging-market asset manager is finding a risky new trade is paying off: buying sanctioned Chinese stocks from Americans forced to dump them.
Fredrik Bjelland, head of private Skagen AS’s emerging-market equity fund in Stavenger, Norway, says almost a third of his nearly $1.5 billion portfolio is in Chinese stocks. Before joining Skagen in 2017, Bjelland was the Shanghai-based head of China for Norway’s sovereign wealth fund, the world’s biggest single owner of equities.
Some of his favorite shares, such as top holding China National Offshore Oil Corp. (Cnooc), China’s main deepwater explorer, and state-owned China Mobile Ltd., are “mispriced in a big way” because of US sanctions that forced owners to unload them, the 44-year-old fund manager told Bloomberg in an interview in London.
“You had a wave of passive and price-indiscriminate sellers,” Bjelland said. “One thing that we like, as contrarian investors, is buying from people who have to sell at an any price. That gave us a very, very good price.”
Cnooc’s dominant position in offshore Chinese oil production as well as projects in Brazil and Guyana are reasons he expects the company to perform well in the future. He says he sees a more than 40% upside in the share based on the discounted cash flow model, an estimation of current value based on future cash flows.
The company’s net income in 2022 roughly doubled due to rising oil prices, and its stock rose 24% last year in dollar terms. That helped Skagen post a 1.5% gain in China compared with a 24% loss on the MSCI China benchmark. Overall, Skagen’s Kon-Tiki Emerging Markets fund has returned in local currency terms nearly 12% so far this year, compared to 9.7% for MSCI Inc.’s emerging-market daily total return gauge, according to data compiled by Bloomberg. Last year, the overall fund lost about 8% as the MSCI fell 11%.
Cnooc was blacklisted by the Trump administration alongside dozens of other Chinese companies in 2021, restricting US investment and forcing its removal from US exchanges and global benchmark indexes. Former Commerce Secretary Wilbur Ross said in a statement then that “Cnooc acts as a bully for the People’s Liberation Army to intimidate China’s neighbors.”
Portfolio Risk
Such warnings can set off a hunt for bargains by self-described contrarian investors like Bjellen.
The US executive order applies to US investors and required them to divest from named Chinese companies by Nov. 11, 2021. While the European Union has introduced some sanctions on China for human rights violations, it has refrained from US-style sanctions prohibiting its citizens from doing business with certain Chinese companies.
Norway is part of the EU’s single market but is not an EU member. Bjelland buys the sanctioned companies’ shares in Hong Kong.
“There is a risk, but we are not seeking to eliminate risk in our portfolio,” Bjelland said. “As an active manager, in order for us to outperform, we have to take calculated risk and we try and take risk when we are more than adequately compensated for it.”
Skagen started buying Cnooc in May 2021 and since then it’s returned 73% in dollar terms. But Bjelland says it remains significantly undervalued. He expects the company to boost returns through production growth, cost management, and capital-allocation strategies including dividends, share buybacks and investments aligned with the energy transition.
The Cnooc trade helped Skagen’s emerging-market fund beat the China index and compensate for losses in Russia, Bjelland said. Bloomberg rankings show his fund has outperformed nine out of 10 peers so far this year, and it beat 81% of peers last year.
More Exposure
The fund’s performance over the past five years, which includes the period before it started snapping up the blacklisted Chinese stocks, was in line with the average for emerging-market equity funds with more than $1 billion in assets, according to data compiled by Bloomberg.
“We have never had more China exposure in the fund than we did in December,” said Bjelland. “We were net buyers of Chinese equities in 2021 and 2022 as they got progressively cheaper from a very high level of valuation at the end of 2020.”
Other Picks
Among his other top picks in emerging markets are renewable energy in Brazil, and conglomerates and banks in Korea. Bjelland says Skagen is mostly avoiding India, which along with the US was one of the world’s few markets that look “expensive relative to their own history.”
Blacklisted companies aren’t the only stocks Bjelland likes in China, either, where he says the lifting of Covid restrictions is expected to help earnings. Another company he likes is Ping An Insurance Group, which he said is positioned to capture growth because penetration for life insurance and long-term protection is still very low in the world’s most populous country.
Ping An’s shares in Hong Kong are up about 8% this year. The company lost about 65% of its value after the outbreak of Covid in January of 2020, before the stock began rallying last November.
“Our strategy is to find things where they’re unpopular, they are cheap and that means that they tend to have fallen,” Bjelland said. “For things to fall rapidly, there needs to be someone who is giving up.”
–With assistance from Jeanny Yu and Sydney Maki.
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