Pessimism towards China as it grapples with demographic, political and geopolitical headwinds as well as idiosyncratic risks in its real estate sector should not obscure the fact that opportunities abound in many other markets in Asia.
That is the view at least of Mike Jennings, senior investment director of TT International.
Sentiment towards China has fluctuated markedly this year after an optimistic start on the back of the country’s reopening rally, which added about $4trn in market value between November and the end of February.
As China’s reopening rally began to fade sooner than many had hoped, sentiment turned sour, which has only been compounded by geopolitical friction with the US as well as problems in the country’s beleaguered property sector, typified by Country Garden.
Lately, there has been no shortage of fund managers who have sought to dial down their exposure to China, with some even eschewing the Middle Kingdom altogether. This is despite the fact that China currently makes up 29.89% of the MSCI Emerging Markets Index.
The TT Asia Pacific Equity Fund is currently underweight China at 22.3% of the overall fund’s allocation, according to its latest factsheet, but Jennings is keen to point out that investors should avoid disengaging with China altogether.
He points to opportunities that exist, particularly in those sectors that align with the Chinese government’s long-term priorities such as clean energy and EVs.
Overall though, he strikes a more optimistic tone when talking about the opportunities in the rest of Asia.
“Within Asia equities, the market is totally focused on Chinese bad news. But don’t let Chinese bearishness cloud your view on the rest of Asia. Our view is the rest of Asia has fantastic opportunities. And some parts of Asia are inextricably linked to the fortunes of China but some parts have really interesting drivers,” he said.
Jennings expresses the increasingly common view that investors may increasingly view China as an separate from the rest of Asia, either dialling up or dialling down their exposure depending on their risk tolerance.
“We might be getting to the point where many investors say it makes more sense to have an Asia ex-China portfolio and then we can choose to either ignore China ourselves or we can choose to actually play China separately,” he said.
“Back in the 70s, Asia included Japan and Japan became dominant and Japan became more developed and then people said let’s do Asia ex-Japan. Logically, it seems to me that China is now 40% of the Asia index so you should pull China out and do Asia ex-China, whether you’re bullish or bearish on China.”
Regarding other markets in Apac, he is particularly bullish on India, Indonesia and Vietnam. India, he concedes, is a challenging market as valuations have become quite stretched as most of the flows last year that left China have redirected towards south Asia.
He points to favourable demographics and other tailwinds, although perhaps more saliently he notes that there are better opportunities among some of the mid-cap stocks.
He gives the example of Lemon Tree in India, which he said is benefiting from a boom in domestic consumption and has the potential to re-rate significantly.
“The beauty is that research is pretty poor so it’s really about going out there, kicking the tyres, meeting the companies, doing our own modelling. For example, Lemon Tree, our model reckons that consensus earnings in our opinion is 20% too low. So, we think there’s a big upgrade in earnings to come through, which the market isn’t aware of. That’s the excitement for us,” he said.
Regarding Asean, which has been underinvested by foreign investment managers for the past decade, he said that most of the firm’s exposure was through Indonesia, although there were pockets of opportunity elsewhere that foreign investment managers overlook.
“Indonesia is primarily the way we’re playing that. We have modest exposure to the Philippines,” he said.
“If we were to do a bar chart of geographic weights in the index, obviously China is the big one and then Korea and Taiwan. And the long tail is Indonesia, Philippines, Thailand, etc — 100bp, 200bp on the benchmark. Most global managers just chop off the tail as it’s too small for them to bother but it creates valuation opportunities for us.”