Although Asian fund managers in the region experienced a downturn in 2018, their sentiment towards investment opportunities in Asia remains positive. For the canny investor, timing is everything, and this present moment bodes well for those punters entering the Asian market, according to fund managers in the region.
After a gloomy 2018, market conditions this year suggest signs of recovery. “Over the past month, we have some seen some of the annual results from companies in Asia and, in fact, the results are not as bad as expected,” says a fund manager covering the Asian equity market from a global asset management company.
Dixie Guo, fund manager of HSBC Jintrust Large Cap Equity Fund / Dynamic Strategy Mixed Fund, echoes this viewpoint. “We have seen the financial results from most of the listed Chinese companies and there are companies which managed to maintain strong levels of performance,” she says.
“Right now, in our portfolio, we continue to have a very big overweight in financials, for example, those banks in Indonesia or India, or Chinese and regional insurers’ names. We also overweight the consumer discretionary sector, including e-commerce and electronics names,” says the fund manager.
Turning to China, the region’s major growth driver, opportunities arise in the photovoltaic (PV) or the solar power industry. Although Chinese companies in this industry are impacted by Sino-US trade tensions, the strength of the market is robust, especially as both domestic and overseas demand remains durable, according to Guo.
“PV electricity in China might cost lower than thermal electricity by 2020, which will boost the development of this sector,” Guo says. In fact, Chinese regulators have just this week issued new rules to improve the pricing of PV electricity.
“Most of the potential stocks in this sector are only listed in the A-share market. The valuation of these stocks might increase about 20-30 times in the long run,” says Guo.
Healthcare is one sector that HSBC favours. “Among all the companies in the Chinese healthcare industry, about 10 of them produce innovative drugs. Unlike the ones with generics as their major business, these innovative companies tend to perform well in the long term,” says Mandy Chan, investment director, head of China and Hong Kong Equities, HSBC Global Asset Management.
Another sector Chan favours is Chinese white wine, or baijiu (白酒). “The companies in the sector are likely to generate more profit as the industry is shifting from retail distribution to direct sale,” says Chan.
Education is also a growth sector, especially given the high penetration of online education in China, according to Chan. “The sector is to generate long-term profits and we plan to hold these stocks longer. There are more underlying assets in the H share market compared to A share,” says Chan.
In addition to these hot topics, investment opportunities can also be found in traditional industries. “We are overweighting what we call the old economy or sectors with lower structural growth opportunities,” says the fund manager, noting that utilities, energy and materials are among these sectors.
So is the case of China. Guo says they have managed to find a number of underlying assets in traditional industries despite the slow growth.
“In each sector, including the traditional industries which are normally less favoured by investors, there are always some companies’ stocks that can outperform. For example, people normally will ignore the steel industry due to its unappealing performance. However, certain stocks in this sector gained 50% last year. These companies are more likely to be undervalued,” says Guo, noting that the key way to find these companies is via bottom-up analysis.
“In 2018, in the first quarter, we started to see some analyst downgrades in Asia. Right now, the analyst downgrade has already lasted for one year. Typically, the analyst downgrade will last for 12 to 18 months. So potentially we are towards the end of this downgrade cycle,” says the fund manager. “We believe that it is still a reasonable time to enter the Asian equity market,” the fund manager suggests.