“After a 140% rally, a 20% correction in A-shares was expected,” Sartori said. “Unfortunately, that turned into a bit of panic. Now the dust has settled a bit and the market has stabilised.
“We have reassessed our view and we retain our medium-to-long term bullish view on China. All reasons that were in place a year ago are still in place. We still think reforms will be implemented and there will be monetary easing,” he added.
The firm plays the China story through Hong Kong-listed H-shares, which have more reasonable valuations than their A-share counterparts.
“China is a five-year story. During the week of extreme volatility, we continued to take medium-to-long term calls. We retained the overweight call on China.”
Some stocks became 30-50% cheaper and the manager took the opportunity to add to existing positions and rotate out of companies that did not have a positive five-year outlook.
Sector bets
The Nikko AM Shenton Asia Pacific Fund had a 36.1% weighting to the financial sector on 30 June, followed by technology (19.4%) and healthcare companies (10.4%). China (34.3%) was the top county allocation.
As a result of the correction, Nikko increased exposure to the healthcare sector and companies involved in clean energy due to relatively better valuations.
“The healthcare sector has become a consensus bullish view. It is a good place to be invested and we have built an overweight position.
“A lot of Chinese healthcare companies have very good prospects, but they were not cheaply valued. They became a lot better valued [up to 40% cheaper] during the volatile period.”
Healthcare opportunities are not limited to China. He thinks there is room for Asian economies to improve healthcare and medical infrastructure spending as a percentage of GDP.
“We are taking a ten-year view and think healthcare is the best place to be invested in Asia.
“When we first implemented healthcare in the portfolio three years ago, it was still a small sector [2% weighting] of the MSCI Asia ex-Japan Index. But in ten years time, we think, it is going to be a much bigger sector of the market. A lot of healthcare companies will come to market and it will increase to over 10%.”
Overweight on “unloved” banks
Nikko AM revised its underweight view on Chinese banks recently. The firm cut its overweight position on Chinese insurance companies and increased exposure to Chinese banks.
“We have gone overweight on Chinese banks because we think fundamentals have bottomed out and are set to improve in next three-to-five years.
He said the overweight call was not related to the market volatility.
“We have been underweight this sector for many years. It has been cheap for a long time. Fundamentals are changing and improving. A lot of bad news on the NPL [non-performing loans] cycle has been priced in.”
Chinese banks’ asset quality and the non-performing loan cycle has been a major concern for the market for a long time.
“We are very aware that Chinese banks are unloved globally and not many people own them.
“But we think the NPL cycle will be much less severe than what banking stocks are pricing in. This is a long-term call for us. It is the first time we have moved to five-year bullish view on Chinese banks in many years.”
Sartori provides investment views on India and Southeast Asian markets in part two of the interview, later this week.
