It’s that time of the quarter when I pick up with my colleagues around the world ahead of writing the next Investment Outlook. I really enjoy these insights from the front line and my latest call with Hong Kong this week provided some interesting ideas from the part of the world which might offer us a template for life after the pandemic.
The next Outlook webcast will be broadcast on July 15 at noon, when we will also publish the summer report. Why not bookmark the Outlook page and put it in your diary?
Back to normal might overstate it, but things are certainly heading that way in Asia’s key financial hub. If anything, it’s the foreign firms which are erring on the side of caution in terms of returning to work. For Chinese firms, things are very much up and running again.
It’s been a tough 12 months for Hong Kong. The street protests began a year ago. Then coronavirus arrived and businesses started working from home in January. People are now out and about again and going to the office even if it’s still not quite as busy as usual.
Asia is pretty much divided at the moment along north-south lines. The richer north, where healthcare is more developed and testing and tracing better organised, is well ahead. South Asia is still firmly in lockdown (Thailand) or emerging from it while cases are still rising (India).
Looking at China, the region’s biggest economy, activity is picking up, but this is starting to be seen as a two-edged sword. It’s great that factories are humming again but there’s a real question about who is going to buy the goods they are churning out. Oversupply could begin to be a problem, another reason why inflation fears are something to worry about in the future and not now.
On the consumption front, retail spending is down although online is taking a bigger share of the overall pie. No surprise there. Perhaps more unexpected is the resilience of the luxury end of the retail market, in both China and Korea.
This reflects the difficulty in travelling around Asia at the moment. There is effectively no international travel in the region. Thailand, for example, will be shut to foreigners until the middle of September. That means people are saving a lot by not taking holidays and they are instead splashing the cash locally on cars, jewellery and the like.
Spending patterns have changed as people shift their consumption online. Unfortunately, from an investment perspective this story is now well known. Share prices look pretty punchy in some cases. It’s also worth bearing in mind that the pure play internet retailers are increasingly facing competition from bricks and mortar shops as things get back to normal. Our fund managers are focused on those companies with strong physical as well as online operations.
Another area of focus is the resurgent trade war between China and the US. This is a concern with companies in 5G, artificial intelligence and robotics in the spotlight for the wrong reasons. Again, however, this is creating opportunities. Investor concerns in these areas have seen some companies become oversold.
Dale Nicholls, manager of the China Special Situations investment trust wrote recently about the contrarian opportunities he is finding in a Hong Kong market which now trades at a big discount to the global average and to the US in particular.
The economic cold war between the US and China is creating other interesting opportunities for investors. Another area where sentiment has become excessively negative is Chinese companies listed in the US, which have been targeted by the US Senate. Unless they provide more transparency in the next few years, US regulators are threatening to delist these stocks from the New York market. This is prompting many of them to gain secondary listings in Hong Kong.
Alibaba is a good example. The e-commerce stock now has 12% of its shares listed in the former colony, up from 4% recently. Getting a Hong Kong listing allows companies to benefit from the so-called ‘south-bound connect’ that allows mainland Chinese investors to buy shares in Hong Kong. These companies could benefit from a wave of money looking to invest locally in brands that are well-understood in China.
A third area of opportunity is related to Beijing’s imposition of new security laws in Hong Kong, which caused a big stir outside the region but which many Chinese in the city are more relaxed about. The Hong Kong market suffered some big sell-offs on the back of the measures and the indiscriminate nature of the selling has unfairly reduced values among companies which are listed in the city but economically more exposed to the wider region.
The final wild card in China is the promise of government stimulus. Unlike the 2008 crisis, this has not so far been a big influence on markets during the pandemic, but there have been some supportive measures already and targeted spending on ‘new infrastructure’ such as 5G and faster internet speeds could provide a marginal boost.
So, overall the region looks relatively good value compared with the tech-focused US market. It is clearly in a better place from a medical perspective, having entered and emerged from the pandemic ahead of Europe and the Americas. And, as ever, it is a great hunting ground for stock-pickers looking to capitalise on some of the pricing anomalies that are starting to be noticed.
The Select 50 list has a range of open-ended funds invested in Asia, many of which inevitably have a heavy weighting to the Chinese market.
The Artemis Global Emerging Markets Fund is a well-diversified fund with a bias towards Asia and most of its top ten holdings are in China. Its investment approach is to look for growth companies available at a reasonable price and with a catalyst for an upward re-rating.
Fidelity China Special Situations is another well-known option for investors who prefer to invest via a closed-ended investment trust. This structure can be helpful for investors in more illiquid markets, allowing the manager to take longer-term views without the concern of flows in and out of the fund. The trust currently trades at an attractive discount to its underlying asset value of more than 10%.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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