Is China finally looking attractive?
This article first appeared on Money Marketing on 9th August 2022 It’s been a horrible 18 months for...
The last decade has been dominated by the US. It’s stock market has returned almost 300% for investors compared with 135% for Asia, 123% for Japan, 100% for Europe and a measly 63% for the UK*.
But is all that about to change? According to JP Morgan Asset Management, yes. It has boldly predicted that the Asian consumer is going to be the tech sector of 2021 and that “This could be Asia’s decade.”
JP Morgan – whose JPM Asia Growth fund is Elite Rated – believes that crises often lead to secular shifts in market performance. “The end of the dotcom boom in 2000 marked the end of US growth outperformance and was followed by a period of strong performance for value, emerging markets and European equities,” the company stated. “After the global financial crisis, the pendulum swung back in favour of the US.
“Our expectation that we may see a similar shift this time is based on our macro outlook and structural changes that are taking place as Asia’s capital markets mature. The north Asian economies (China, Korea, Taiwan), which represent the bulk of the investable universe in Asia, have been more successful in containing the pandemic than the rest of the world. Due to the limited outbreaks and the ability to keep track of infections, these economies appear to have put Covid-19 behind them. While Europe and the US still face significant restrictions to contain the spread of the virus, China is already back to pre-crisis levels of activity.”
In the long term, structural growth prospects in Asia are underpinned by urbanisation and the growth of the middle class. These trends are set to continue in the next decade in three of the most populous countries in the world – China, India, and Indonesia – creating large domestic and consumer-led markets.
The new free trade agreement signed last year also covers 10 ASEAN countries, China, Japan, Korea, Australia and New Zealand, together representing almost a third of global GDP. This should support the long-term growth outlook as inter-regional tariffs are reduced and trade is made easier. As a result, Asian companies will be provided with plenty of opportunities to grow in the coming years.
Dales Nicholls, manager of Fidelity China Special Situations, told us more about the trade agreement in this week’s podcast:
Jason Pidcock, manager of the Jupiter Asian Income fund, commented:
“I expect to see strong economic growth around the world in 2021, particularly as it will be compared to the low base level from 2020. This should be matched by an improving employment trend and higher levels of consumer confidence. This economic rebound should itself provide support to stock markets, but there are other related factors that contribute to me feeling optimistic about the year ahead in Asia Pacific equities. The first of these is the continued very low interest rates and rising supply of money seen in most major economies. This may in time lead to concerns about inflation.
“And, as economic growth returns, corporate profits improve and relief spreads that the economic damage from Covid was not even more prolonged, I expect investors will deploy more of the cash reserves they had built up, as they sought easily tradeable and defensive assets in a time of strife, increasing demand for shares and contributing to rising prices.
“I see three sectors in the Asia Pacific region that stand out to us as being able to capture the upside of rising markets but also offer some insurance against the risks that come with higher inflation. The first is companies with real assets, which are able to achieve favourable re-pricing such as some property and commodity companies. The second is consumer-focused businesses with resilient sales and pricing power, particularly in the food & beverage and health & hygiene sectors. The third is industrial and technology companies with strong balance sheets, the proven ability to innovate and discipline when it comes to using their capital.”
Richard Sennitt, manager of Schroder Oriental Income Fund, added:
“As with other regions, Asia has moved higher driven by a cocktail of liquidity, hopes of a successful vaccine roll out and the prospect of a recovery in earnings. Aggregate valuations are now above long-term averages and increasingly starting to price in this recovery.
“However, the wide divergence of valuations and prospect for the broadening of the earnings recovery means that, although, there are some areas of the market starting to look ‘frothy’, such as in selective electric vehicles, biotech and tech names, other areas of the market have lagged and are trading at relatively attractive valuations. Here we continue to look for those attractively valued names that have a reason to rerate, such as select property and financial names, rather than seeking value for value’s sake given the long-term structural challenges faced by some of the companies in these sectors from ongoing disruption.
“We are also selectively looking for names in India and ASEAN countries whose markets have lagged those of North Asia substantially. North Asian countries have suppressed COVID incredibly well when compared to India and many ASEAN countries who have had more difficulty in managing the virus and also a lack of listed lockdown beneficiaries. Going forward, a vaccine and an eventual return to ‘normal’ should benefit these countries disproportionately. Thailand, for instance, is set to massively benefit from any resumption in global tourism albeit this will take time. Furthermore, countries such as India and Indonesia have announced a number of structural reforms which should aid long-term growth.”
*Source: FE fundinfo, total returns in sterling for the S&P 500, MSCI Asia ex Japan, TOPIX, MSCI Europe ex UK and FTSE 100, over ten years to 26 January 2021