“There are definitely signs of bubbles in parts of the market and you need to be careful about the price you pay for a company and its growth profile,” said Swan, speaking to the press about the firm’s mid-year Asia investment outlook.
“Inside A-shares, small and mid-cap growth stocks are trading at 80-100 times price-to-earnings. Some pockets are very stretched but in the overall market we still see great opportunities. But you need to be disciplined around what you own.”
PE multiples are a good rule of thumb. “Anything with a multiple over 50-60x, tends to be an area that will struggle in the medium to long term.”
As China shifts from an era of accelerating growth to one of stabilizing growth, Swan has reduced some value and risk ideas. He likes structural plays and finds opportunities in the large cap, blue chip segment.
“How you invest in an environment of stabilising growth is very different than accelerating growth. You need to have valuation discipline and be very stock specific.”
Active managers, therefore, will have “enormous opportunities in China”, he added.
Swan said the China market, even though it has surged 150% year-on-year, is trading at a similar multiple to the US. He remains upbeat on the Stock Connect initiatives.
“We’re seeing north and southbound [capital flows] into and out of China starting to expand gradually. It’s not been entirely smooth and the full benefits have not yet been felt. There’s an enormous amount of trapped liquidity starting to find its way out [of China] and the first port of call for southbound investment will be Hong Kong.”
Reform synchronisation
Both Swan and Neeraj Seth, head of Asian credit, underscored the importance of the structural reform efforts in China, India, Japan, Korea and to some extent Indonesia, which “for the first time are synchronized”, Seth said.
Swan added that Asia’s reform process is the largest he’s seen in 15 years. He believes reforms will unlock the same powerful economic potential in China as WTO entry did in 2001.
In Asia, despite India’s “delayed” or “watered-down” reforms, he still likes Indian equities.
“The economy has disappointed, the fiscal environment is much tighter than expected. We’re disappointed about the [central bank’s] guidance, which is hawkish on inflation and therefore no rate cuts are in the foresee-able future.”
However, if fiscal spend starts to grow quickly, as he expects, “that should be expansionary for the economy.”
Swan is underweight Southeast Asia equities, which are particularly vulnerable to US monetary policies. “We maintain very little exposure to the region which we expect to remain curtailed until a period of growth returns.
The US interest rate hike expected some time this year should benefit Asian equities in the long-term because the US economy is growing and inflation expectations are picking up, Swan said. “Asia historically has benefitted from US economic growth.”
However, a big risk looms. “If the markets view a rate lift-off as premature and see a growth scare globally, and all risk assets are sold off, Asia would be sold off in that environment.
Asian markets are weak in anticipation of the rate hike. “If we do see a selloff, we see that as a buying opportunity.”
