North Asia equities are expected to outperform their Southeast Asia peers in the year as the latter continues to have difficulty in containing Covid-19, according to William Yuen, Hong Kong-based investment director at Invesco.
“Longer-term, we clearly like Asia as a whole, but over the next 12 months, we are convinced that the North Asia markets will give you more visibility in terms of earnings recovery,” Yuen told FSA recently.
Southeast Asia equities have largely suffered this year. On a year-to-date basis, the MSCI AC Asean Index continues to be on negative territory at -9.05%, while the MSCI AC Asia ex Japan Index, of which at least 80% are composed of North Asia equities, had double-digit returns of 18.18%, according to FE Fundinfo.
Yuen co-manages the Invesco Asia Consumer Demand Fund. According to him, the fund’s portfolio now consists of mostly North Asia equities given the team’s not-so-positive outlook on Southeast Asia.
“Earlier this year, we had holdings in Singapore, Indonesia and in Thailand as well. But when we assessed the situation of the outbreak earlier, it was difficult for us to be very convinced about Southeast Asia, so we pretty much sold out the Asean part of the portfolio,” he said.
As of the end of October, 91% of the fund’s assets were invested in North Asia, with China accounting for the bulk of the portfolio, according to the fund’s factsheet. The only non-North Asia markets the fund is invested in is India and the Philippines.
“You will find that we are positive on the North Asia market, especially on the Chinese consumer market,” Yuen said.
“There have been a lot of opportunities in China backed by underlying macro factors that are boosting the whole consumption story, mostly driven by internet-related services, which is something not new to us.
“We have been investing that way [even before the pandemic], but clearly, the Covid-19 outbreak has accelerated the shift of spending patterns, which continue to benefit some of these newer industries that we invest in.”
The fund has done well this year. It has outperformed the Asia ex-Japan index, returning 25.48% on a YTD basis, according to FE Fundinfo.
Not a tech fund
The top 10 holdings of Invesco’s Asia Consumer Demand Fund include the most popular internet or technology companies, such as Tencent, JD.com, Alibaba and Samsung, which are widely held by other Asia- or technology-focused funds.
However, Yuen argues that it is not a tech fund.
“The top 10 holdings do not represent the whole portfolio. We look at a broader set of the universe and invest in companies that serve Asian consumers.
“If you look at our sector allocation, we have investments in consumer staples, healthcare, consumer discretionary – some of them are part of e-commerce, communication services and some gaming companies. So it is broader than a sector fund,” he said.
Yuen looks at five major themes in consumption, which include digitalisation, premiumisation, experience, urbanisation and wellness.
Yuen noted that while sector allocation is diversified, the portfolio consists of only around 30 names.
“We have a selective approach and like companies that have a competitive advantage over their peers in terms of innovation and creativity. If you look at our top 10, all of them are leaders in their sectors.”
The fund is managed and supported by a sizable team. Yuen has been managing the fund since its inception in 2008 and was joined by Hong Kong-based co-managers Shekhar Sambhshivan in 2015 and Mike Shiao in 2018. The trio gets support from the firm’s at least 20-member Asia (ex-Japan) equities team, according to Yuen.
Risks
When it comes to risks, Yuen is cautious about economic shocks.
“One key element flowing from the consumer theme is income. If there is a shock in the economy again, that would disrupt job security, income generation and how people spend. If we have another economic slowdown, I don’t think it will be good for consumption,” he said.
This further explains his conviction toward China.
“We expect China’s economy in the fourth quarter will be better than the third quarter, as we have seen the progression of its recovery.
“In addition, if you look at global markets, there has been an unprecedented amount of stimulus coming from fiscal and monetary easing. But if you look at China, the policies made have been very minimal. If we see another potential downturn, we believe China has a lot more flexibility in order to support its economy.”
