The phase 1 trade deal is intact, and although friction will continue between the US and China over technology and geopolitics, relations between the two countries are likely to be less fractious, according to Rob Mumford, investment manager, emerging markets equities at GAM Investments.
In an environment of pragmatism that will extend after the US presidential election in November, investors can focus on the compelling domestic case for China equities, he told a media event on Friday.
“China has the firepower to mitigate economic or exogenous risk,” said Mumford.
“It was the first country that went into the Covid-19 growth shock and is leading the way out, with the authorities ready to add further policy support if needed to limit downside risks,” he said.
Mumford manages the $267m Gam Star China Equity Fund, which focuses on domestic-oriented names. He favours sectors that should benefit from secular trends as well as a cyclical recovery, and should generate the strongest earnings growth.
“There are powerful positive secular investment themes such as consumer behaviour shifts, new technology and infrastructure, healthcare reform, renewable investment, as well as mega capital flow trends as China’s equity markets open up further to overseas investors,” said Mumford.
Source: GAM Investments, Bloomberg, July 2020
He explained that the consumer discretionary sector is boosted by growing middle class spending, online penetration, urbanisation, consumption upgrading and brand innovation.
Meanwhile, technology and digitisation, with 5G development, cloud computing and artificial intelligence are driving massive data creation and management needs.
“Data is power, it is the new oil,” said Mumford.
Within the healthcare sector, he sees continued demand across the spectrum, including pharmaceuticals, healthcare providers, supplies, technology and life sciences tools, services and biotechnology.
Currently, the portfolio’s largest sector allocations are in consumer discretionary, communications services, financials and healthcare, according to the latest fund factsheet (31 July), and its biggest individual holdings are Alibaba, Tencent and Jd.Com.
The fund is up 15.29% so far this year, similar to its MSCI 10/40 benchmark (15.41%), according to FE Fundinfo data. However, its three-year cumulative return of 20.67% lags both its index (25.43%) and its Greater China peers (38.83%), according to FE Fundinfo.
The fund and the sector is volatile, ranging between 20% and 25% over the past three years.
Nevertheless, China equities provide “attractive valuations for premium growth, which is a compelling prospect in an increasingly growth-starved world,” said Mumford.
Gam Star China Equity Fund vs sector average and MSCI China 10/40 index
