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Can Asia financials provide growth opportunities?

JP Morgan AM favours some banks in emerging Asia, as well as stock exchanges and insurance firms.
Janet Tsang, JP Morgan Asset Management

While growth-oriented names in Asia are usually found in new economy sectors, several financial stocks can also provide investors with long-term growth opportunities, according to Janet Tsang, investment specialist for emerging markets and Asia-Pacific equities at JP Morgan Asset Management.

“Unlike technology or healthcare companies, financials usually belong to the ‘old economy’ sectors and are usually perceived as interest-rate sensitive, which means they may not be in favour at the moment given the low-interest rate environment,” Tsang told FSA recently.

However, that does not necessarily mean that all financial firms do not provide growth and are unattractive in the current market environment.

“We are invested in some banks, but they are in higher potential growth markets. For example, in Indonesia and in India, financial product penetration is still low, compared with the more developed markets in Asia,” she said.

JP Morgan AM’s Asia Growth Fund has at least 23.95% of its assets in financial firms, which compares with the 18% weighting in the MSCI AC Asia ex-Japan Index, according to data from Morningstar Direct. On average, Asia-focused products also hold 18% of their assets in financial companies.

Managed by Joanna Kwok and Mark Davids, the fund invests in quality growth names, which are profitable companies with strong balance sheets, offers sustainable returns and growth prospects, as well as having good corporate governance.

Besides banks in higher growth markets, the fund is also invested in insurance companies and stock exchanges, according to Tsang.

“The insurance market is also underpenetrated in Asia when compared to the West. For stock exchanges, we like Hong Kong Exchange (HKEX), mainly because it is a beneficiary of the liberalisation of China’s capital market, whether you are talking about the Connect programme or US ADRs coming back to Hong Kong. We believe there are many positive things that we can expect from the HKEX,” she said.

Four of the fund’s top 10 holdings are financial firms, including insurance companies in Hong Kong and China, PT Bank Central Asia in Indonesia and HKEX, according to the fund’s factsheet.

JP Morgan Asia Growth Fund – top 10 holdings

Source: Fund factsheet.

Positive on Asia

Separately, Tsang said that the firm continues to be positive on Asia equities as a whole, given that the Covid-19 situation in some markets, particularly in North Asia, are improving.

“If you look at the Covid-situation, North Asia is slightly improving [relative to South Asia and the rest of the world].”

She noted, however, that the firm’s higher allocation to North Asia markets, including China, Taiwan, Hong Kong and Korea, is not a result of a top-down view of the pandemic situation.

JP Morgan Asia Growth Fund – geographical allocation

Source: Fund factsheet.

“It is mainly because from a bottom-up perspective, we see many of quality growth names available in these markets. It is different in South and Southeast Asia, where you don’t have a lot of new economy names.”

In addition, although Asia equities have recovered and rallied since the March sell-off, she believes that valuations are not expensive.

“On a price-to-book basis, we are back at 1.6 times, which is around the long-term average. So valuations are not excessive at all.”

Besides financials, technology companies make a sizable portion of the JP Morgan Growth Asia Fund – at 24.12%, versus the index’s 19.67% weighting, according to Morningstar Direct.

“In the past few months, we have continued to top up on some software names in China A-shares, as well as online entertainment stocks, such as gaming, in China and Southeast Asia,” Tsang added.

The JP Morgan Asia Growth Fund versus its benchmark index and peer average

Source: FE Fundinfo. In US dollars.

Part of the Mark Allen Group.