Henry Chan, BEA Union Investment
“At the start of this year, we expected the markets [in Greater China] to deliver modest returns over the course of 2019, recovering from their over-sold state at the end of last year. Economic fundamentals hadn’t changed, and markets had room to return to their historical averages,” Henry Chan told FSA in an interview.
“But, a 15% rally by stock prices in China, Hong Kong and Taiwan in the first quarter of this year meant that markets have already returned to fair valuations,” he added.
Chan, who oversees the $230m BEA Greater China Growth Fund, believes there is still further near-term upside potential, but the catalyst for future gains will come from positive earnings surprises later this year and into 2020.
“It is no longer about closing the valuation gap. Companies must post higher earnings than expected in order to push prices higher.”
However, investors cannot expect indiscriminate gains. Instead, they need to be selective about sectors that are likely to thrive and try to identify particular companies that will prosper most.
Chan is a fan of the technology sector, where the supply chain has transformed from earlier dependence on providing components to Apple and other multinationals to carving out new specializations in innovative industries such as solar energy.
His fund’s largest holding is Taiwan Semiconductor, the world’s largest chip manufacturer, in which it has a 9.4% weighting, compared with 6.74% in the MSCI Golden Dragon index, which the fund manager refers to as a proxy but not as an official benchmark.
The fund has earned a 47.2% three-year cumulative return compared to 37.63% by the Greater China fund category average, but less than the 54.3% by the index. Its annualised volatility of 17.48% is higher than both the index (16.58%) and the sector (16.75%).
The fund’s largest overweight sector is financials, nearly 10 percentage points higher than the index, and includes out-sized bets on AIA Group, China Construction Bank and Hong Kong Exchanges & Clearing.
“These are chosen for the stock-specific characteristics as well-run companies with earnings growth potential,” said Chan.
He points out that most of the fund’s portfolio is exposed to the Hong Kong market, whose direction is closely correlated to the US markets.
“There is a danger that US markets over-react to economic data by extrapolating the future intentions of policy makers, in particular the US Fed,” said Chan.
“Volatility in the US could be replicated in the Hong Kong market.”
“Moreover, for a further boost in Greater China markets in general to be sustainable, asset allocators need to feel positive about the global outlook. When that happens, they move up the risk curve and raise their exposure to the region,” he said.
BEA Greater China Growth Fund versus sector average and MSCI Golden Dragon index
