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Blackrock’s Swan prefers old economy to new

Blackrock’s Andrew Swan is bullish on old economy stocks and cautious about technology, while overweighting China, India and Indonesia in the company's flagship Asia ex-Japan equity fund.

Andrew Swan, head of Asian and global emerging market equities at Blackrock, manages the BGF Asian Dragon fund. The fund’s AUM was $3.46bn on 30 April 2017, according to data from FE, more than double the number a year ago ($1.62bn on 29 April 2016)

Swan’s rationale for caution on the IT sector is valuation. “Over the last six months we’ve seen profit recovery of 25%, but the sector has gone up more than that, 35%,” he said during the company’s semi-annual investment outlook briefing in Hong Kong yesterday.

The sector’s expanding P/E ratio is due to the market pricing-in new technologies, which Swan said was too early to do. His views are reflected in the fund’s underweighting of Taiwan, Hong Kong and Singapore equities.

By contrast, the materials sector has seen earnings grow by 30% in the same period, but the prices are up only 6%. “The market thinks that the recovery in the old economy is not sustainable,” explained Swan. “We believe it is.” 

In China, in particular, cyclical sectors such as materials, energy and financials are likely to perform well, he said. The supply-side reforms in the steel industry, for example, have reduced overcapacity, boosting the utilisation of the existing capacity. Low iron ore prices combined with flat steel prices result in improved margins. The improved profitability of the industry is likely to flow to other sectors such as financials, he believes.


BGF Asian Dragon Fund sector and country allocation 

Data: FE, Blackrock

The potential inclusion of China A-shares into global indices is not likely to have a material impact on share liquidity, Swan argued. “It is more about sentiment, a start of a long-term process of bringing foreign investors into the China market, which is very under-owned.” 

MSCI’s decision on the inclusion is expected on 20 June.

India’s equities tend to always look expensive, Swan said, due to the high return on capital demanded by the market and a high growth rate. Nevertheless, “the economy still has lots of tailwinds for growth,” he added.

“[Although] policy reforms have been quite negative in the short term, we believe the economy will expand in the coming years, driven by public sector spending as the country is moving into an election cycle the next couple of years,” Swan said.

“The impact of GST [goods and services tax] will be positive for capital expenditure in India as businesses start to reorganise under the new tax environment,” he said. “But you still need to be very selective because it’s a market with very high valuations.”

Swan added that his fund is currently underweight in India’s information technology and pharmaceuticals stocks, but overweight in financials and utilities.

Three-year performance of the BGF Asian Dragon fund vs benchmark and sector average

All fund NAVs have been converted to US dollars. Note that funds in this chart may be denominated in currencies other than the US dollar.


Part of the Mark Allen Group.