Despite investors’ concern on a slowdown in economic growth, there is upside potential for quality names riding on the structural growth cycle, said Value Partners in its midyear outlook.
The firm favours equities in the technology hardware sector, especially in South Korea and Taiwan, which will benefit from sustained demand for semiconductors and electronic components
“The internet-of-things-driven era opens huge growth avenues, which translates to sustainable earnings headroom for companies across the value-chain of the industry,” said the Hong Kong-based asset manager.
Even though manufacturers have announced plans to expand capacity, Value Partners believe that expansion will take time. While inventory levels continue to be at a multi-year low, the firm expects the semiconductor cycle to last until 2022 or beyond.
China’s growing healthcare industry is another booming sector for stock investors to keep an eye on, as the number of people over 65 years of age will reach 366 million by 2050.
“Despite the growing needs, medical expenditure in China still lags other markets, making up only 6.6% of total GDP compared with 17% in the US and 12% in Japan and Germany. While this calls for the need to ramp up investment in healthcare, it also implies the massive potential growth of the industry in the country.”
Although the Chinese government has launched a centralised bulk procurement programme to cut drug prices, leading pharmaceutical companies are likely to gain market share and are in a better financial position to absorb the drop in profit margins.
Value Partners also sees opportunities among leading Chinese drug distributors, “as they are set to take more market share because of better hospital connections, logistics, warehousing, and financing support”.
The firm expects that the top Chinese drug distributors will deliver 10-15% revenue-to-earnings growth in the medium term, which compares with the 8-9% growth in the broader healthcare industry.
However, it warns against potential policy headwinds which may impact individual names. It is also watching out for “idiosyncratic” events that might affect capital markets in the second half of 2021.
The firm believes that the credit markets will stay jittery for the last six months of the year, and investors should continue to monitor financial and property issuers for default risk.
“[But], overall, Asia high yield continues to provide attractive value over Asia investment grade and US high yield,” said Value Partners.
“To neutralise risk exposure in Chinese property, we [recommend] diversifying into commodities and consumption-related credits as defensive plays.”
