Trade Wars, Chinese Growth and Corporate Reforms: The Outlook for Asian Equities

Eric C. Moffett, Portfolio Manager, Asia Opportunities Equity Strategy

How will the addition of China A-share stocks to the MSCI global and regional indices impact your portfolio? What are the opportunities/risks in China A shares?

The inclusion of A-shares in MSCI doesn’t impact what we are doing and doesn’t creat a big opportunity in itself, but it’s fair to say that the A-share market is the most exciting place to invest in Asia today because it is very, very inefficient. A-shares make up about 9% of my portfolio today. The market's inefficient because local retail investors are looking to get rich quick, but if instead your focus is to try and get rich slowly through good compounders, there’s still very good companies at reasonable valuations.

China and India have shown strong commitment to reforming their economies in the last couple of years. What investment opportunities have presented themselves in the wake of these reforms?

China and India have pushed through a lot of reforms in recent years, and it does createsome opportunities. In the case of China, they’ve done a lot in terms of moving up the value chain, investing so that they’re not just making t-shirts and tennis shoes, but now are making high tech equipment etc. So from an investment standpoint, when you can being to invest in companies that are taking market share from some of the global companies we all know, that kind of growth is very high quality.

In India, the biggest reforms have really been around building infrastructure. For years and years, this country didn’t have enough coal to fuel its plants, not enough power plants, not enough roads, but today that is all getting built and that’s really important because it means more and more people in the country are getting connected to the rest of the economy. It also means that a lot of the inflation that we used to experience, because food stuffs would spoil on the way to market, is becoming less and less of a problem. So, this structural reform leads to a lot of margin expansion for certain companies and also it improves the quality of the macro for India as well.

China’s economic growth is slowing as the government continues to push companies to de-leverage. Are you concerned about a disruption to growth in China?

China is committed to deleveraging and we’ve started to see it come through in thenumbers. I do think it raises the risk that the economy slows down more than peopleexpect. In my portfolio, I don’t own a lot of cyclical things that would be leveraged to thattrend. Anything cyclical needs to be kept on a short leash right now becausegovernment policy is clearly focused on deleveraging this economy.

How vulnerable is Asia to an escalation in trade disputes between China and the US?

Asia is less vulnerable to trade disputes than it once was. Ten to fifteen years ago, thevast majority of its trade was with big western economies but today that’s not the case.Most of their trade is with other emerging markets. If a trade war breaks out with theUnited States, that’s clearly bad for Asia, but the impact is much less severe than itwould have been years ago.

Outside of China where are some of the other opportunities that you find most exciting in Asia?

Outside of China some of the most interesting opportunities are in South East Asia.These are economies where people are still very, very poor, growth is still very high andthere’s a tremendous amount of excitement and investment. Those countries includeplaces like Indonesia and Vietnam. Now these markets are not very liquid right now, soit’s hard to find a lot of investment opportunities.


The following risks are materially relevant to the strategy

  • Country risk (China): all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licence or the Stock Connect program may be subject to additional risks.
  • Currency risk: changes in currency exchange rates could reduce investment gains or increase investment losses.
  • Emerging markets risk: emerging markets are less established than developed markets and therefore involve higher risks.
  • Issuer concentration risk: to the extent that a portfolio invests a large portion of its assets in securities from a relatively small number of issuers, its performance will be more strongly affected by events affecting those issuers.
  • Small and mid-cap risk: stocks of small and mid-size companies can be more volatile than stocks of larger companies.

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