Tidal wave of liquidity leaves value investors in a bind

ARE the disciples of Benjamin Graham throwing in the towel in Asia?

According to Ronald Chan, founder and chief investment officer of Chartwell Capital Ltd, value investors have become powerless in the face of a tidal wave of liquidity.

Since January, mutual funds and exchange-traded funds have poured US$116 billion (RM474.39 billion) into Asian equities, with much of that flowing to bluechips. Receiving particular attention have been the so-called dragon heads, stocks investors believe are likely to benefit from a broad-based economic recovery. Small and medium caps are being left behind.

Even in mainland China, where small growth stocks have typically dominated, the Beautiful 50, a term for the 50 most influential companies on the Shanghai Stock Exchange, were defying gravity until state-owned Xinhua news agency called out the exponential rise of liquor maker Kweichow Moutai Co.

All this makes for a terrible environment for value funds. One way for them to stay relevant is to mutate and adapt to the new environment, a topic of much discussion at Thursday’s annual Asia Value Investor Conference in Hong Kong.

It was surprising to hear Moutai and fellow distiller Wuliangye Yibin Co, whose shares are up 91 per cent this year, described as value stocks. The duo trade at just over 16 times earnings, 25 per cent cheaper than Diageo Plc.

Pitting a high-end liquor brand with a dominant market position against a diversified spirits maker like Diageo, or putting a smallcap stock up against a large one, may not be fair.

Moutai deserves a valuation discount because of political risk. A 750ml bottle can cost more than US$200, well beyond the reach of many ordinary Chinese households. Guizhou, one of China’s poorest provinces where Moutai is based, could ask the company to contribute more to local-government revenue. Moutai is state-owned, after all.

And what’s value without growth? Qingling Motors Co, which produces light-duty trucks in China, seems a good income play with a 7.5 per cent dividend yield.

Michael Liang, chief investment officer of Foundation Asset Management, however, considers it a prime example of why investors can’t just copy and paste value-investing techniques to China.

Qingling Motors hasn't seen any top-line growth, so its yearto-date return of 12.4 per cent pales next to the spectacular rally of Geely Automobile Holdings Ltd.

If the Hang Seng Index were to dip below its 50-day moving average, that needn’t be too much cause for concern.

But when value investors start to capitulate, then it’s time to worry.