Andreas Roemer, head of emerging markets at DWS Investments, the retail asset management arm of Deutsche Bank, like quality Chinese consumer and small and mid-cap companies.

Andreas Roemer, head of emerging markets at DWS Investments, the retail asset management arm of Deutsche Bank, tells WealthBriefingAsia why the market sell off in China is throwing up opportunities. 

WBA: What investment opportunities are you seeing in China at the moment?

Andreas Roemer:Over the last few months, there has been a lot of criticism concerning the corporate governance quality of Chinese companies. This has triggered a sell-off of certain investments, although some of the accusations have not been thoroughly researched. We believe that the partially indiscriminate market sell-off is overdone and provides a good opportunity to buy high quality companies with strong business models and superior earnings power during the correction. 

WBA: Do you think certain Chinese companies have weak corporate governance?

Andreas Roemer:We do agree that there is room for improvement and expect that the current discussion will increase awareness and strengthen corporate governance standards in the future. 

WBA: Some investors are withdrawing from China following concerns over corporate governance issues and inflation. How are you negating this?

Andreas Roemer: The Chinese equity market has been suffering from inflation fears, monetary tightening and policy uncertainty. However, we expect inflation to peak soon and GDP growth should continue robustly. After the weak performance over the last quarters, the Chinese equity market trades at very attractive valuation levels. Therefore, we think the Chinese equity market currently provides an attractive entry point to investors. The DWS Invest Chinese Equities fund allows investors to benefit from the structural growth potential of China.

WBA: Are inflation levels impacting investments? How can investors avoid this?

Andreas Roemer: In an environment with rising inflationary pressure, it is crucial to analyse the inflation impact on operating margins and therefore on corporate earnings. In this context, we avoid stocks which are suffering from margin pressure due to input cost inflation and limited power to pass on price increases to consumers, for example, food and beverage companies lacking strong brands. On the other hand, some companies with strong pricing power can benefit from inflation, like luxury goods companies or department store and supermarket operators that benefit from higher merchandise prices.

WBA: How do you expect Chinese stocks to fare in the mid to long-term?

Andreas Roemer:We expect Chinese shares to rebound in the second half 2011, due to several factors. Firstly, the Consumer Price Index is likely to see its high in June or July due to the peaking of food prices and the positive base effect compared to levels in 2010. Secondly, we are approaching the end of current tightening cycle as M2 (a broad measure of the money supply) growth has already dropped below the government’s target of 16 per cent. Third, social housing will be a key driver for fixed asset investment as well as related consumption in the second half, and lastly, GDP should continue to be robust at around 9 per cent in the second half of 2011, so fears of a hard landing are overblown.

WBA: What are the risks?

Andreas Roemer: The main risk factors are a weaker-than-expected economic recovery in the US and a further escalation of the Eurozone debt crisis.

WBA: Your fund underperformed in the first quarter. How are you changing your strategy?  

Andreas Roemer: The DWS Invest Chinese Equities underperformed in the first quarter by more than 3 per cent, as it was overweight in the consumer discretionary sector and had too much exposure to small- to mid-cap stocks which are relatively illiquid, and were hit more by selling pressure due to outflows. However, in the second quarter the fund strategy achieved an outperformance of 1.8 per cent as we stuck with our good quality consumer and small/mid-cap names, therefore reducing the underperformance for the first half of this year to 1.6 per cent.