The complex and unpredictable market backdrop that investors continue to face offers a favourable environment for contrarian investors in Asia and EM equities.
As businesses and wider industries suffer temporary challenges, Invesco believes that more investors need to step out of their comfort zones to capitalise on emerging trends or turnaround stories earlier than can be done by simply following the herd.
“Focusing on the balance sheet strength of a company… can offer reassurance that there is some mitigation against potential risk of loss in an investment,” said Fiona Yang, a fund manager in the firm’s Asian and EM equities team.
Value for money
Her priority when taking a contrarian view is valuation. “When there’s lots of negative news around, it can often be a good time to buy, which might seem counter-intuitive.”
This acknowledges the fact that companies go through cycles, plus that human psychology or emotion can push markets into overly negative territory.
Yet such irrationality in markets and a herd mentality often lead to assets being mispriced, added Yang.
She can see the benefits of a contrarian approach from Asia’s position in the current economic cycle, given that inflation in the region is so low compared with the developed world. As a result, Asia isn’t facing the same pressures as in the US and Europe, reducing the potential financial risk if central banks raise interest rates with the aim of reducing inflation.
Yang believes this leaves China and other Asian countries more room to encourage economic growth.
“As economies such as China continue to re-open and governments across the wider region get behind industry with pro-growth reforms and supporting measures, we believe the region to have some of the most exciting investment opportunities in the world,” she explained.
To capture this potential, Yang urges investors to have patience and a willingness to go against the market.
They also need a deep understanding of the market, the specific asset and the underlying fundamentals, she said.
“We do the fundamental work and speak with company management to gauge where consensus is wrong. This gives us the confidence to lean into this perceived risk and buy potentially mispriced assets,” she added. “The other side of the same coin is to avoid expensive assets during periods of euphoria.”