Stay with China equities, says CIO

Asset Class in Focus

Bill Maldonado, chief investment officer at HSBC Global Asset Management, has questioned defensive strategies as these names have become expensive in the last 12 months.

Chinese equity markets have performed positively this year, with the CSI 300 Index returning 27.3% and the MSCI China Index 12.18%, according to data from FE.

Despite concerns over the trade war between US and China, Maldonado believes that China will continue to perform positively this year.

“The Chinese market has held up well so far this year but [it’s rebounding] from a quite low level, so we expect China to continue producing decent returns for the rest of this year and potentially into next year,” Maldonado said at a recent media briefing.

“Despite concerns over the trade agenda, we think China’s policymakers are good at striking a balance between risks of the economy overheating and stimulating the economy by maintaining flexibility in fiscal and monetary policies,” he added.

So far, the views of the investment community on China equities have been divided.

On one hand, there are those who are positive on the asset class. For example, portfolio manager Rob Mumford at Gam Investments has taken a positive stance on China, citing attractive valuations. SSGA’s Kevin Anderson is also positive on the asset class, given China’s long-term growth story.

On the other hand, Deutsche Wealth Asset Management has become cautious about Chinese equities as industrial profits and business sentiment have started to wane. The manager of UBS Asset Management’s China-focused multi-asset product has also become neutral the asset class until he sees some improvement in the US-China trade war and stronger economic growth.

EM over DM

Overall, Maldonado prefers emerging market equities, particularly Asia, over developed market peers.

“We are overweight equities in emerging markets, not because the prospects for developed markets are bad, but actually the prospects for emerging markets, especially in Asia, are better.”

For example, valuations for Asia ex-Japan equities are more attractive when compared to the US and globally, he said.

EPS growth forecastP/E ratioP/B ratio

2019 E

2020 E2019 E

2019 E

Asia ex-Japan

4.10%

13.90%13.2x

1.4x

Europe

1.20%

10.80%13.8x

1.7x

US

3.80%

11.70%17.5x

3.2x

World

2.90%

10.90%15.3x

2.1x

Source: HSBC Global Asset Management

He also expects Asia ex-Japan earnings to outperform the rest of the world this year and in 2020, he added.

Not defensive

In terms of sector calls, Maldonado prefers the more cyclical parts of the market, such as financials.

“For us, the real value is in the more cyclical parts of the market. These value stocks are often very undervalued compared to defensive names.

“Because investors have been so concerned about the global economy, they tried to protect themselves by buying defensive names. The problem with that strategy over the last six-12 months is that those defensive sectors have become very, very expensive.”

Not all asset and wealth managers share the same view. JP Morgan Asset Management and UBS Wealth Management have recommended clients take a more defensive stance.

Maldonado noted that not all of the firm’s investments are in value names.

“It doesn’t mean that the whole portfolio needs to go there. But from having a significant tilt in that direction, in our view, creates good long term value for investors.”

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