Missed the China Rally? Could wider Asia offer opportunities?

Having suddenly announced that the economy was finally reopening back in October last year, China’s equity market experienced the “mother of all U-turns” rebounding almost 50% from the trough at the end of October 2022 and February of this year*.

But if you missed the Chinese New Year boat, don’t worry – not only may the rally not be over, but the positive impact on the wider region is far from done. According to the IMF, growth is set to accelerate to 4.7% this year up from 3.8% in 2022 and “this will make Asia and the Pacific by far the most dynamic of the world’s major regions and a bright spot in a slowing global economy”.

Value still to be found in China

Despite the sharp rally, the Asian equity team at Invesco still sees value in China. According to product director John Pellegry, the drip-feed of positive news coming out of the county is a sea change from 3-6 months ago.

“Moving from Zero-Covid to herd immunity; supportive measures for the property sector; warm words and approval of licenses for the internet companies; détente with Australia; the list goes on…,’ he said. “Recent quotes from our Teams chat include: “it’s all happening”, and “too much good news for me to handle!” from Will Lam (manager of Invesco Asian fund), who was pondering what the next contrarian opportunity might be!” 

Where else are there opportunities in Asia?

SooHai Lim, head of Asia ex China equities at Barings says the Association of Southeast Asian Nations (ASEAN) which includes Singapore, Indonesia, Malaysia, Thailand, Philippines, and Vietnam, has a number of supportive demographic trends that are driving ASEAN’s positive longer-term picture, and which have the potential to stimulate economic growth.

“ASEAN today has the third-largest aggregated population in the world, behind China and India,” he said. “This large and relatively young population, and an increasingly wealthy middle class, are already driving exciting changes in consumption patterns. These demographics, combined with a number of investment themes unfolding in the region—from the evolution of consumption behaviours, to supply chain enhancements, to technological upgrades, to the green transition—are presenting compelling opportunities in ASEAN companies.”

Likewise, Richard Sennit, manager of Schroder Asian Alpha Plus says Asian economies can benefit from the improved outlook for China. He says: “Neighbours Taiwan and South Korea are just a short hop away and possess global industry leaders in key Asian export sectors that have favourable long-term secular growth drivers. Valuations in these markets tend to be even more appealing than they are in China. Meanwhile, several financial companies in Hong Kong, Singapore and other parts of Southeast Asia should be beneficiaries of higher interest rates and offer attractive valuations and yields.

“Other economies such as India, Vietnam and Indonesia, have helpful demographics and relatively low debt burdens, which should lead to decent long-term economic growth, and interesting company specific opportunities as domestic consumption increases.”

Four funds to consider in Asia

Investors considering investing in the Asian region could consider one of the following four funds:

Matthews Asia ex Japan Total Return Equity

This fund will invest across the region in firms of all sizes and will have a significant proportion in medium and small-sized companies. It blends stocks exhibiting dividend growth with more stable, established yielders. China has the fund’s largest country allocation at 42% currently**. A further 20% is invested in Taiwanese companies**. Other country allocations included India, Vietnam, Malaysia, Indonesia, Singapore, and Thailand**.

JPM Asia Growth 

This is a concentrated, high-conviction fund built off JP Morgan’s extensive research platform. Its Hong Kong based managers will invest in the shares of up to 60 companies of any size, primarily focusing on quality, growing businesses to generate superior capital gains than their peers and the wider market. The fund has exposure to Vietnam, Thailand, Singapore, Indonesia, Korea, Hong Kong, and Taiwan, while its largest two country allocations are to China and India**.

Ninety One Asia Pacific Franchise 

This fund invests in quality growth companies. More than 55% of its value is in its top ten holdings and the total portfolio only comprises around 30 stocks. Most of these are larger firms. The fund’s emphasis is on finding exceptional businesses through detailed fundamental research. 40.7% of the fund is currently invested in Chinese companies**. The rest of the portfolio is allocated to countries such as Australia, Taiwan, South Korea, India, Hong Kong, and Vietnam**.

Guinness Asian Equity Income 

This fund invests in companies across the whole Asia Pacific region, including Australia. The portfolio is concentrated in just 36 equally weighted stocks, and has a one-in, one-out policy, looking for a combination of capital and dividend growth. The fund’s largest country allocation currently is to China (36.4%) followed by Taiwan (19.3%) and Australia (10.4%)**. It also has exposure to Singapore, South Korea, Thailand, Malaysia, India, and Hong Kong**.

*Source: FE fundinfo, total returns in sterling, 31 October 2022 to 1 February 2023
**Source: fund factsheet, 28 February 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and should not be taken as investment advice. The funds mentioned are for illustration purposes only and should not be taken as a recommendation to buy or to sell.

Published on 27/03/2023