China’s anti-graft drive has gottenCheah Cheng Hye more bullish on mainland stocks than at any time since valuations plunged in the global financial crisis six years ago.

The chairman of Hong Kong-basedValue Partners Group, which runs the best-performing Greater China equity fund during the past five years, is predicting a further gain of about 15 percent for the Shanghai Composite Index by year-end. While President Xi Jinping’s anti-corruption measures may be a short-term drag on growth, they will make state-owned enterprises more efficient and help curb excessive debt, he said.

The call by Cheah, who was dubbed the Warren Buffett of Asia by Apollo Global Management’s Tan Chin Hwee for his long-term track record of picking undervalued stocks, pits him against Tom DeMark, the developer of market-timing indicators who forecast Aug. 4 that the rally may end within days.

“We are seeing that the anti-corruption campaign is for real,” Cheah, 60, whose $547 million Value Partners China Greenchip Fund returned an annualized 13 percent during the past five years to beat 134 peers tracked by Bloomberg, said in an Aug. 2 interview in Shanghai. “This is giving a lot of encouragement to investors.”

Xi’s campaign to rein in graft reached new heights last week as the government announced a probe of former security chiefZhou Yongkang, the highest-level corruption investigation since the ruling Communist Party came to power more than 60 years ago.

The anti-corruption measures will improve the quality of China’s economic growth and bolster investor confidence, Cheah said. Gross domestic product will expand 7.4 percent this year, according to the median of 54 economist forecasts compiled by Bloomberg, compared with 7.7 percent in 2013 and 10.4 percent in 2010.

“The kind of growth you get from corruption is what we call useless growth,” said Cheah, whose firm manages about $10.5 billion. “Investors are willing to accept a lower growth rate in China. Maybe 6.5 percent growth is OK.”

China also needs to improve corporate governance if it wants to lure back investors after a 60 percent slump for the Shanghai Composite Index since the start of 2008, Cheah said. The gauge has gained 4.9 percent this year after rebounding 11 percent from its January low. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong entered a bull market on July 28 with a 20 percent rally from its March low, and has gained 1.8 percent this year. The iShares China Large-Cap ETF sank 1.5 percent to $40.47 yesterday.

David Fuller's view

DeMark is looking at what China has done over the last few years – fall back from range highs - and is betting that it will do so once again. 

Cheah is the insider at China’s stock market, and obviously hugely influential.  My worry, which I have also had for Japan, is that it would be hard to bring back local investors.  They suffer from the adage which you may recall: ‘Those who know it best, love it least, because they have been hurt the most.’  Market recoveries from depressed levels need local support, to give the moves sustainable legs.  Cheah’s optimism will help to draw them back to China’s stock market. 

You can see the 10-Year charts above and here are the 5-Year graphs for SHASHR and HSI.  China has the lowest valuations of any major stock market.  It also has a lower correlation to Wall Street than most other markets.