Positive signs have emerged for China’s equity market, enabling the country to play a key role in driving opportunities in Asia as the region reopens in the coming months.
According to Sean Taylor, chief investment officer Apac and head of emerging market equities at DWS, growth in China equities will come from three areas: a pick-up in the domestic economy and the opening of trade; discounts on the American depositary receipts (ADRs); and the risk premium on China.
In his view, the combination of these factors makes China investable. And if the current Covid-19 wave eases, it will go some way to also relieving some of the inflationary pressures. “China on a relative basis will look very attractive,” said Taylor.
In the meantime, he is calling on investors to be very selective. “[They should] keep in mind the ebbs and flows of the geopolitical situation.”
Region-wide growth
Taylor also sees opportunities across Asia, where better company earnings have helped local markets to outperform.
In Hong Kong, for example, there is scope to capitalise on the low valuations of many stocks.
Asean countries are also expected to see growth. Singapore has done particularly well in its reopening, said Taylor, who is overweighting the country, especially the financial sector, Further, he highlighted Thailand and Indonesia to benefit from reopening, with increased hope in the return of tourism, as well as rising commodity prices.
Japan is another overweight country in the DWS portfolio. “Japan will do well, particularly with China picking up, as many Japanese company earnings are linked to China, and they will definitely benefit from that,” Taylor explained. This again bodes well for domestic financials.
Maintaining a mix
Beyond equities, DWS is emphasising the importance of portfolio diversification to hedge against inflation.
“We still like equities over fixed income, but we think investors should use real assets to hedge the volatile market,” said Taylor. In line with this, instead of having 60% bonds, the firm thinks investors should consider commodities and real assets.
Within fixed income, DWS is still positive on credit and high yield, particularly in the oil and commodity space. Taylor prefers Asian credit as an asset class since Asia has better spreads and a more robust story.
“We have always had a strong structural view on Asian credit and think it is diversified relative to developed market fixed income,” he explained.
He pointed to opportunities based on solid fundamentals and cheaper assets stemming from the sell-off in Beijing and widening credit spreads due to the property issues in China, the pandemic and regulatory issues.
For the time being, however, DWS is finding better credits around the region, including in Japan, India and Indonesia.
