Trade war cre­at­ing op­por­tu­nity in China: in­vest­ment board CEO


Mount­ing pres­sures on TORONTO China, in­clud­ing the lat­est trade ten­sions with the United States, are cre­at­ing po­ten­tial in­vest­ment op­por­tu­ni­ties for the Canada Pen­sion Plan In­vest­ment Board, says Mark Machin, chief ex­ec­u­tive of the pen­sion-man­age­ment or­ga­ni­za­tion.

“Our teams are busy,” Machin said Fri­day in a phone in­ter­view dur­ing his lat­est trip to China. “I think, given the soft­en­ing mar­kets in China and re­lated mar­kets, (we) will prob­a­bly see some in­ter­est­ing in­vest­ment op­por­tu­ni­ties emerge.”

He said the trade ten­sions over tar­iffs ar­rived when China was al­ready “wrestling ” with a num­ber of do­mes­tic is­sues, in­clud­ing delever­ag­ing its econ­omy, re­duc­ing the shadow bank­ing sec­tor, and un­wind­ing some of the stim­u­lus that helped the coun­try weather the fi­nan­cial cri­sis of 2008. “The com­bi­na­tion of all th­ese pres­sures has put quite a lot of pres­sure on the pri­vate sec­tor in par­tic­u­lar in China, which will throw up in­ter­est­ing op­por­tu­ni­ties for us over time,” he said. “They’ll need cap­i­tal.” CPPIB, which has in­vested $28 bil­lion in main­land China since es­tab­lish­ing a lo­cal Hong Kong of­fice in 2008, plans to boost the pro­por­tion of its port­fo­lio in­vested in China from less than 8 per cent to up to 20 per cent by 2025. In Au­gust, the pen­sion-man­age­ment or­ga­ni­za­tion com­mit­ted US$1.4 bil­lion to the Good­man China Lo­gis­tics Part­ner­ship, which was es­tab­lished by CPPIB and Good­man Group in 2009 to in­vest in lo­gis­tics prop­er­ties in prime lo­ca­tions across main­land China. Good­man and CPPIB have com­mit­ted a to­tal of US$5 bil­lion to the part­ner­ship. Machin said the trade is­sues and fis­cal tight­en­ing are de­vel­op­ments that could none­the­less have an ef­fect on economies around the world.

“It’s a con­cern that we have this re­ally high trade ten­sion be­tween the U.S. and China … I think it’s un­likely it goes away quickly, un­for­tu­nately,” he said.

Still, prices re­main buoy­ant in the United States, where fu­ture earn­ings ex­pec­ta­tions are much higher than else­where in the world, pos­si­bly un­re­al­is­ti­cally so, Machin sug­gested.

“We’re quite late cy­cle in the U.S. Mar­kets are pric­ing in quite an op­ti­mistic out­look for cor­po­rate per­for­mance,” he said. “When we’re look­ing at in­vest­ments we have to be very care­ful the com­pa­nies we’re in­vest­ing in are ac­tu­ally priced ap­pro­pri­ately for the risk that they’re not go­ing to be able to meet those lofty ex­pec­ta­tions in the fu­ture.” CPPIB re­ported in­vest­ment re­turns of 0.6 per cent in the three months ended Sept 30, a pe­riod in which a strong Cana­dian dol­lar cre­ated a “cur­rency drag” on re­turns.

Many in­vest­ments are held in for­eign cur­ren­cies, but the pen­sion-man­age­ment or­ga­ni­za­tion re­ports in Cana­dian dol­lars and does not hedge cur­ren­cies. Machin said re­turns can be ex­pected to fluc­tu­ate with global eco­nomic cy­cles, and more fo­cus should be placed on five- and 10year re­turns be­cause sus­tain­abil­ity of the CPP Fund, which is in­vested to pay fu­ture ben­e­fits of the Canada Pen­sion Plan, is mea­sured over a 75-year pe­riod.

The five and 10-year re­turns are 12.1 per cent and 9.1 per cent, re­spec­tively.

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