Recent China data suggests an impact on commodity prices.
“The biggest change is the producer price index (PPI) turning positive for the first time in 55 months, meaning the pricing power is coming back to those upstream producers,” he told FSA. The PPI gained 0.1% in September compared to a year earlier.
Chay is part of the team who manages the Manulife Dragon Growth Fund, which invests mainly in companies listed on the Hong Kong Stock Exchange. He has added exposure to some cement, coal and oil companies that he believes are set to benefit from an increase in commodity prices.
He added that the increased exposure to cyclical companies is more stock-specific rather than a sector overweight. The industrial sector accounts for 9.7% of portfolio exposure and basic materials 3.98%.
The key theme of the fund remains China’s new economy. Four internet-related companies — Tencent, Alibaba, Weibo and Ctrip.com — account for 22% of the portfolio.
Commodities could get a boost if oil prices rise next year, although it is still unknown whether the Organisation of Petroleum Exporting Countries (OPEC) will actually cut production.
In addition, the National Bureau of Statistics of China expects the producer prices to grow in the coming months, according to a Reuters report.
“Based on historical data, when China’s PPI turned positive, it has stayed there for at least a year,” Chay said.
Standard Life Investments emerging markets economist Alex Wolf cautioned in a report that the surge in Chinese industrial profits might not be sustainable: “While producer prices could continue to climb, firms will show diminishing capacity to keep costs low if labour expenses and commodity prices rise.”
The biggest risk for China equities in general is the weakening yuan, Chay noted, which might prompt speculators to short the stock market, as the forex market is still under tight control of China’s central bank.
David Gaud, Edmond de Rothschild Asset Management’s senior fund manager and global investment specialist also called an opportunistic buy on cyclical sectors in China.
The three-year performance of the Manulife Dragon Growth Fund against its benchmark, the MSCI Zhong Hua Index: