To outperform market, JPMorgan China fund picks tech hardware, EV suppliers and health care stocks in correction
- JPMorgan’s US$7.9 billion A-Share Opportunities Fund outpaced the market in 2020, but has struggled in 2021 amid economic, regulatory hurdles
- Chinese stocks have lost their mojo and regressed into rangebound trading patterns for most of the past three months
The fund’s current “high conviction” bets are driven by bottom-up analysis, which favours cyclical growth areas such as technology hardware, pharmaceutical outsourcing and EV supply chain, co-manager Rebecca Jiang said in an interview.
The fund had 21.1 per cent of its money in information technology sector, 18.1 per cent in consumer staples, 17.3 per cent in financials and 13.4 per cent in health care among its largest allocations at the end of April 30. Its top 10 portfolio holdings include Ping An Insurance, Wuliangye Yibin, BOE Technology and Contemporary Amperex.
After a bright start to the year, Chinese stocks have lost their mojo and regressed into rangebound trading patterns for most of the past three months. Jiang attributed that inertia to fading euphoria from China’s first-quarter economic rebound and efforts to normalise accommodative monetary policies.
“While policy tightening has brought multiples closer to earth than last year, the upside in Chinese stock prices will be capped by subsiding stimulus and slower profit growth ahead,” strategist Jing Sima said in a June 9 report. “As such, a decisive breakout to the upside in Chinese stock prices will require major reflationary catalysts, and it is the reason we are still risk averse on Chinese equities.”
Even so, the A-Share Opportunities Fund has taken a long view of the economic outlook and increased its holdings in some of the prominent bets in the market, according to fund reports. It raised its net-asset weights in EV battery producer Contemporary Amperex, Ping An Insurance and Jiangsu Hengrui Medicine, for example, over the past four months, according to the reports.
“The hardware sector is in a sweet spot at the moment,” Jiang said in the interview. “From a cyclical perspective, hardware is well supported by the global economic recovery as the sector is more sensitive to the macroeconomic cycle than software,” she added. “From a structural perspective, it is a beneficiary of the US-China decoupling as China focuses on developing import substitution.”
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Even in high-profile industries like EV manufacturing in which China is the biggest market globally, Jiang said it’s possible to ride the trend by taking a deeper dive, while steering clear of expensive carmakers that attract government scrutiny and other industry risks.
“When it comes to electric vehicles, we prefer to get under the bonnet,” Jiang said. “We do this by looking up and down the EV supply chain for areas with the most attractive pricing power.”
She prefers battery companies which supply to many different carmakers, including companies which compete with one another. That way “it doesn’t matter to our portfolios which EV brand does best at any point in time. The supplier will benefit either way.”
Additional reporting by David Yong