Alexander Treves, JP Morgan AM
The Omicron variant and concerns around inflation had already dampened investor sentiment, but anxieties have been further exacerbated by Russia’s invasion of Ukraine. Yet, consumers, labour markets and business activities throughout the world, on the whole, remain strong, according to JP Morgan AM.
“Our view is that investors should take a long run perspective when managing their assets,” Alexander Treves, head of emerging markets and Asia Pacific equities investment specialist, at JP Morgan AM told FSA.
In particular, “there are a number of structural growth areas which offer secular opportunities as rising spending power in Asia Pacific is paired with more and more exciting innovation from Asian companies,” Treves said.
For example, in North Asia, he sees world-leading companies in both technology hardware (in Korea and Taiwan) and in a range of internet business models (in China).
Carbon transition offers another promising opportunity, said Treves. China is among the major Asian economies that have announced net-zero emissions targets, and so is moving towards greater consumption of cleaner energy, becoming a leader in the use and manufacture of electric vehicles (EV) and solar energy equipment.
Another area which combines attractive long term growth opportunities with cyclical upside is the financial sector. Asia remains an underbanked region, and banks in markets such as India are using technology to grow their customer bases, like mobile banking, according to Treves.
“Moreover, we believe many banks will be beneficiaries of the ongoing cyclical upturn, as demand for credit increases, delinquencies decline, and rising interest rates boost profits. Prospects for rising dividends are underpinned by stronger management confidence in raising payout levels.”
Major risks
However, inflation is one of the more obvious challenges which investors face, because of the impact on input costs for companies, and because of the risk of a policy overreaction from central banks.
For example, many consumer companies saw some margin pressure in the second half of 2021 as the price of raw materials rose faster than shelf prices for finished items.
“We aim to mitigate this risk by focusing on industry leaders with attractive brands which are likely to have the most robust pricing power over time – enabling them to pass any further cost increases on to customers” said Treves.
Regulation in China is another area that investors are keeping an eye on, as the government takes steps to pursue a more sustainable growth path while accepting some slowdown in the pace of that growth.
“We feel that many of the regulations which have affected internet stocks have been more targeted and logical than some observers have recognised, and they are consistent with similar steps taken in the West,” Treves said, adding that however, the communication of these regulations could be finessed, and this is likely to contribute to volatility in markets.
Bundling strategy
Treves recommends JP Morgan AM’s “bundling strategy”, which involves pairing growth and value strategies to achieve a combination of both in a broader portfolio, rather than focusing on one or the other.
While both growth and income stocks can have attractive long-term prospects, they perform differently at different points in the cycle, he said.
Growth stocks performed better in 2020, for example, as the Covid-induced stay-at-home economy boosted the fortunes of new economy names in areas such as e-commerce and online entertainment. Conversely income names fared better in 2021 as the prospect of vaccine rollouts led to expectations of economic reopening, with favourable implications for more cyclical assets, Treves concluded.
