Despite the ongoing tech and property crackdown, the threat of delisting for those quoted in the US bourses, as well as the resurgence of Covid-19 outbreaks, China equities and credit still provide attractive opportunities for investors in Asia, says Amundi group chief investment officer Vincent Mortier.
In an interview with The Edge Singapore, Mortier says that investors are increasingly shunning Chinese assets, driven by the policy uncertainties and further economic headwinds. However, there are many interesting opportunities in China that investors can explore as the bulk of the policy-driven uncertainty has been priced in by the market, he says.
“We are seeing more and more of our clients staying away from China, and we continue to think this is a mistake as Chinese assets are cheap and policy visibility has improved,” Mortier adds.
Chinese stocks were especially volatile in March this year, experiencing a sharp decline due to delisting risks before seeing a rebound as Beijing signalled support for the market. The MSCI China Index, which tracks Chinese stocks including those listed in Hong Kong and US, plunged over 23% in the first half of March, before going up 15% towards the end of the month.
That being said, China’s economy will likely be more resilient than European or US economies, says Mortier. “If investors are long-term and ‘courageous’, this might be a good time to buy in China, as equities and credit are really interesting and cheap.”
Amid rising Covid-19 cases among its residents, China has introduced a zero-Covid policy, which is one of the world’s strictest measures to curb the pandemic. Citing the lockdowns as “naturally challenging” to growth in the short term, its impact would depend on its duration, the areas covered, and the measures the Chinese government can put in place to compensate for the economic hit.
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“To achieve its ambitious 5.5% growth target in 2022, [Chinese] policymakers will have to exit the zero-Covid policy, deliver additional stimulative policies for the housing market — in particular for individual developers in the next stage — and follow up on monetary and fiscal policy promises in a faster pace,” says Mortier.
Although it may require a lot of effort for investors to find specific opportunities within the Chinese assets space amid the broad universe, Mortier reiterates that it is something that investors should not ignore. “I think it is a mistake for investors to not strategically allocate part of their portfolio into China,” he adds.
See also: Time to rethink traditional thinking in emerging markets
Looking beyond big tech names
When it comes to the specific opportunities in the Chinese equity market, Mortier says it is important for investors to look beyond the larger tech companies that most investors would be familiar with, such as Tencent Holdings and Alibaba Group Holding.
“Investors will need to look at smaller names with better visibility and more innovation below the surface. In fact, there are a lot of interesting names in various sectors that deserve attention. We are positive on the technology names in China as they are cheaper than the technology names in the US, especially the latter’s non-profitable technology names that are trading at up to 51 times P/E,” says Mortier.
He also highlights that last year, for the first time in history, China has spent more on research and development in terms of US dollar compared to the US. According to China’s National Bureau of Statistics, the country’s research and development spending growth rate in 2021 was more than 40% higher than in the previous year at RMB2.79 trillion ($600 billion).
This leads to a slew of new companies growing exponentially, offering good prospects in various sectors, including renewable energy and tech disruptors which Amundi sees opportunities in.
According to data compiled by Bloomberg, Asia’s five best-performing equity funds of over US$1 billion returned at least 40% each by investing in stocks that are part of the renewables and electric-vehicle supply chains. Some of the names that are invested by the outperforming funds include power battery maker Contemporary Amperex, electric vehicle maker BYD and the world’s largest lithium producer Ganfeng Lithium.
China National Offshore Oil Corp, one of the top 10 holdings of Amundi Funds China Equity at 1.7%, for example, is currently actively pursuing renewable energy projects with the goal of building up annual capacity of at least 5,000 megawatts by 2025. The company, with shares trading over 37% higher this year (as at April 5), is diversifying from oil and gas by developing onshore solar and wind farms.
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Meanwhile, investors need to be cautious on China’s real estate sector, which has been hammered by the ongoing regulatory crackdown on the heavily indebted property sector. Although it is still considered a ballooning risky sector, Mortier says there are opportunities that can be found, as the demand for real estate as both accommodation and an investment asset class are poised to continue.
US equities favoured over European equities
Besides China, there are still other markets investors can consider. Although some US names can be expensive, Amundi is favouring US equities over European ones, whose companies are undergoing a more uncertain earnings path.
According to the asset management company’s April global investment views, lower expected growth and looming stagflationary risks in Europe support the relative appeal of US equities, with a focus on quality and dividends.
Due to its proximity to the crisis, Europe is more affected by the crisis in Russia and Ukraine, with deteriorating earnings outlook for European companies. The US, on the other hand, is less affected.
Although Amundi is not expecting an economic recession to occur in the US due to ample liquidity, strong labour markets and robust consumer earnings, there are pressures on the economic recovery that could create difficulties for companies in meeting this year’s profit expectations.
Amid this, the firm is continuing to focus less on cyclical businesses and more on value and quality, aside from being “constructive” (or positive) on companies that reward minority shareholders through buybacks and dividend payouts.
In terms of sectors, Amundi is “constructive” on US consumer services over retail in the consumer discretionary sector. In banks, it is focusing on well-capitalised names that have reduced leverage and are more retail-oriented with large domestic operations, which should allow for better crisis navigation. In tech, it explores reasonably priced quality names that are less cyclical, given that tech spending is generally less economically sensitive.
Photo: Amundi
