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China’s sovereign wealth fund moves in on Newton Oriental Fund’s top holding

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China’s sovereign wealth fund has made a USD850m foray into Noble Group, the largest holding in Jason Pidcock’s Newton Oriental Fund.

“This gives China Investment Corp a 15 per cent stake in Noble Group and allows Noble to invest further in global agricultural commodities,” says Pidcock. “However, the deal is probably more important in terms of what it says of China’s current ambitions. Noble has already seen its second quarter profits double this year as China, the world’s biggest buyer of commodities, has ramped up purchasing to fuel its USD586bn stimulus programme.”

So far this year, China’s aluminium imports are reported to be up 14-fold, lead imports are up by a factor of ten and copper imports have more than doubled. 
 
“Noble Group is attractive as it supplies a great deal of China’s metal needs along with numerous food commodities such as soybeans,” says Pidcock. “However, Noble’s expertise as a supply chain manager is probably of equal importance. This is an area where China has worked very hard in recent years. Its ‘going out’ policy is now a decade old and has seen China acquiring substantial stakes in companies and in direct resources in Africa, South America and right across Asia. This year will see China’s overseas investment race past the level of foreign direct investment into China, making it a capital exporter for the first time. While all this has been going on, China has developed a supply chain that is now probably second only to Japan’s.” 
 
But despite China’s insatiable appetite for growth, Pidcock is happy to remain underweight relative to the regional FTSE index.
 
“Although China remains the unquestioned engine of growth in Asia it’s likely to have quite a bumpy ride from here. We expect to see renewed volatility as Chinese bank lending cools from record levels. So far this year, around USD1.1trn has been lent by China’s banks,” he says. 
 
“We can also expect to see measures such as new car ownership – a major beneficiary of the lending programme – dropping away significantly after incentives helped to drive a 90 per cent increase this year. Even so, much of the money borrowed by Chinese companies this year is still sitting on deposit awaiting acquisition opportunities so it’s likely to fuel continued deal activity from here.”
 
Over 30 per cent of the Newton Oriental Fund is invested in Australia at the expense of weightings in Korea, India, China and Taiwan. The portfolio is also becoming increasingly concentrated, as this allows Newton to play into China’s growth potential but avoid many of the growing pains along the way.

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