Bright spots in Asian stocks can be found amid trade war gloom

Tai Hui says the fundamentals apply, particularly at a time of trade frictions and market turbulence: investors should stick to a diversified portfolio and seek out good companies and growing industries. Sound investment opportunities can still be found

PUBLISHED : Friday, 06 July, 2018, 11:16am
UPDATED : Friday, 06 July, 2018, 10:29pm

Unsettled Asian markets are leaving investors in a fragile mood. Stocks in some Asian markets were hovering around nine-month lows earlier this week and currencies were similarly worrying. After falling to its weakest level in nearly a year, the Chinese renminbi reversed course following vows from the nation’s central bank to keep the currency stable and not to deploy it as a weapon in its trade conflict with the US.

Investors who feel like they are on a roller coaster could be forgiven for freezing in place, but trade worries don’t completely overshadow what is still a broad basket of interesting investment opportunities across Asia equities.

Indeed, most of the sharp corrections of the past few weeks and months are largely attributable to external influences – rising US interest rates, a stronger US dollar and protectionism threatening trade growth – while domestic fundamentals remain strong and have demonstrated more resilience than during the 2013 “taper tantrum”.

For example, despite the heavy correction in the Chinese equity index in the past three months, China’s health care and consumer sectors have outperformed the benchmark. This reflects the growing middle class in China wanting better medical coverage and a higher standard of living.

The latest market angst notwithstanding, interesting and potentially overlooked long-term investment themes in China equities also include software, China’s younger generation, and changes in consumption patterns.

China stocks: who are the winners and losers in the US-China trade war

China’s software spending is growing faster than its gross domestic product, on the private and public side. This has been driven by the macro environment as well as the impact of cloud software lowering capital expenditure significantly.

The rise of the so-called Generation Z – the generation born in the 1990s and early 2000s – is another investment theme with staying power. This young generation has shown a higher tendency to spend on content and is more proactive expressing themselves online. In three years’ time, this generation will account for roughly two-thirds of online spending across various categories.

China’s education sector is equally dynamic – currently over 25 per cent of parents in China’s middle class send their children to private schools, so it is a growing trend and we’re seeing a number of companies benefiting from this.

China’s life insurers also look interesting, given the long-term growth opportunities underpinned by unmet consumer demand. Similarly, quality retail banks are benefiting from long-term opportunities in growing consumer credit in China and with controlled asset quality risks.

China’s state media talks up stock market as strategist says it’s not time to buy

For investors still worried about lingering volatility over trade, India’s equity market also looks like a relatively compelling bright spot. Despite the rout in emerging market currencies in the first half of the year, the Indian equity benchmark managed to maintain a positive year-to-date return in local currency.

India’s export-to-GDP ratio is only 12 per cent, compared with China’s 19 per cent or Hong Kong’s 144 per cent. It is not in the US administration’s crosshairs when it comes to tariffs. Hence, it is rarely linked to the global trade tension. Its private-banking sector is also benefiting from a boom in demand for financial services from the population after a wave of reform to enhance penetration.

Beware the bear as US-China trade war looms over Hong Kong stocks

Southeast Asian equities represent yet another fundamentally positive, long-term story. Over half of the region's population is below 30. Rising levels of urbanisation, financial inclusion and mobile connectivity are powerful structural drivers.

Trade tensions are going to remain a fixture for some time, but this does not mean investors should just hide under a desk and wait for the storm to blow over. They should fight – instead of taking flight – with their portfolio. This means picking attractive companies rather than simply relying on major equity benchmarks.

It also calls for a long-term strategy when making investment decisions, instead of going for short-term tactical trades. Maintaining a diversified portfolio to manage volatility and risks, by mixing equities with fixed income, is still key.

In equities, we can still find good opportunities less exposed to global trade and benefiting from the rising demand of local consumers.

Tai Hui is chief market strategist, Asia Pacific, at JP Morgan Asset Management