Hong Kong: Fears of a US recession are triggering Asia-focused money managers to raise bets on companies that are geared to domestic demand in fast growing China and India, while cutting exposure to exporters.
Fund managers, many of whom have touted the virtues of Asian consumption players such as China Mobile Ltd and Bharti Airtel Ltd for a year or more, say the dire string of US economic data only strengthens the case for investing in the sectors that benefit most from Asia’s robust economies.
They said the bad US news is also forcing them to take a harder look at export-heavy markets such as Japan and South Korea.
“The one pocket of growth for now at least is Asian consumers, particularly in China and India,” said Anthony Muh, head of Asia Pacific for AT Asset Management, which manages about $1 billion (Rs3,930 crore) in regional equities.
“We’ve been pulling back on cyclicals, on the export sector, and adding more to domestic consumption and raising a little bit of cash to keep our powder dry to take advantage of some of the pullbacks.”
He said stocks the firm holds that reflect this theme include China Mobile and Bharti Airtel, the leading mobile phone service providers in the world’s two most populous countries. Both firms have seen profits surge as more Indians and Chinese buy mobile phones. And unlike exporters, they are unlikely to feel much, if any, impact from slowing US growth. China Mobile shares have fallen about 1.8% since the start of the year, compared with a 2.6% dip in MSCI’s index of Asia Pacific stocks outside Japan. That index has weakened since a 4 January report that the US unemployment rate hit a two-year high of 5% in December.
In anticipation of a slowdown, Allianz-owned fund house RCM has shifted its $17 billion Asia Pacific portfolio away from Asian exporters and Japanese stocks in general, said Mark Konyn, chief executive of RCM Asia Pacific.
Japanese stocks slid on Thursday to an 18-month closing low, dragged down by auto makers including Toyota Motor Corp., Honda Motor Co. Ltd and Nissan Motor Co. Ltd.
“The Japanese economic recovery has been totally built on the performance of the export sector,” he said.
“In most of the rest of Asia, there’s an opportunity for substitution. We’ve significantly shifted away from exporters, more to domestic consumption plays.”
Konyn, who declined to name specific companies, said preferred sectors include retail, telecoms, construction and infrastructure and that it is overweight Hong Kong property stocks. Major holdings at the end of November included China Mobile and Hong Kong’s Kerry Properties Ltd, according to factsheets on the company’s funds.
Fund managers said that while further Asian market declines were a strong possibility, they were not bearish enough to massively raise cash levels or shift into traditional safe havens like utilities, which typically have low growth but steady dividends.
Given that non-Japan Asian economies are still growing, there are still good opportunities to invest in “defensive growth” stocks like telecoms and property firms, said Khiem Do, head of Asian multi-asset investment at Baring Asset Management.
Do, who oversees about $15 billion in Asian equities, said the firm has added to its holdings of China Mobile, PetroChina Co. Ltd and Sun Hung Kai Properties.
“Why don’t we go to 20-30% cash? Because we think that fundamentals in Asia are still great. So once the negative sentiment is over, we think Asian markets will pop up massively, so we don’t want to miss that,” he said.
The Hong Kong-based fund manager did warn pockets of the market, particularly food stocks, are looking pricey.
Indeed, Asian markets are more highly valued than their Western counterparts.
India’s BSE trades at 21 times 12-month forward earnings, while Hong Kong-listed shares of Chinese companies trade at almost 18 times, according to Reuters data. By comparison, bluechip US stocks trade at less than 14 times forward earnings. But fund managers said these high valuations shouldn’t necessarily discourage investors.
“In a nutshell, China is still a fast growing country,” said Winson Fong, who oversees $700 million as head of greater China equities for Societe Generale Asset Management.