JPMorgan Asset Management rotates China exposure amid volatility and trade tensions, eyes health care

Re-rating has hit the returns that can be expected from IT and tech stocks, including Alibaba and Tencent, says chief investment officer for emerging markets in Asia-Pacific

PUBLISHED : Tuesday, 10 April, 2018, 7:05pm
UPDATED : Tuesday, 10 April, 2018, 7:05pm

JPMorgan Asset Management is reducing its exposure to Chinese information technology and technology sector equities, as well as to consumer-oriented companies, Richard Titherington, the chief investment officer for emerging markets in Asia-Pacific, said on Tuesday in Hong Kong.

The company is shifting towards health care because of increasing market volatility on the back of US-China trade tensions.

Also, stocks that include Alibaba Group Holding and Tencent Holdings have fallen to fair value levels because of significant re-rating. Their expected returns have declined to 10 per cent from 25 per cent a year ago, said Titherington.

Chinese A shares offer diversification amid global market volatility, says JPMorgan Asset management

Asian equities have resulted in positive returns in 20 of the past 31 years. However, there were periods in these years when the markets fell by close to 20 per cent. This means last year’s benign stock environment was abnormal.

“We have brought down the risk in our portfolios in order to recognise that volatility was going up,”

said Titherington. “Clearly, the trade issue is a wild card. I am sure in 2018 you will have a bigger sell off in markets.”

The Hang Seng Index is currently down 8 per cent from its record high of 33,484, which it hit in January. But there are signs that China might be willing to concede its trade dispute with the US, and remove trade barriers that will help Washington reduce its trade deficit.

In a keynote speech in Boao on Tuesday, President Xi Jinping vowed to defend globalisation and urged the use of dialogue instead of confrontation to avoid “zero-sum games”, a possible reference to the trade tensions between the US and China. “China’s door is opening up and will not be closed. It will only be opened up even further,” he said.

Larry Hu, a China economist at Macquarie Bank, said Xi mentioned four areas of concern: lowering market entry barriers; improving the investment environment; strengthening intellectual property protection; and increasing imports.

China will substantially cut import tariffs for automobiles and some other products this year, said Hu. Xi also alluded that Beijing would “work hard” to increase imports that people demand the most, including medicines, as well as energy and large aircraft.

Titherington said he was targeting a broadening of the emerging market team’s research coverage to 250 Asian companies from 130 going forward, with the top priority being the mainland’s A-share market.

“We still think China A shares look cheap. If you look at financials, real estate, insurance – they all have quite high expected returns so they look attractive,” he said. “If you look at what both sides have done, they are both quite careful to avoid hitting globally significant sectors such as smartphones.”