Speaking at a recent media event in Hong Kong, senior fund manager Yu Chen Jun said he believes China’s economic recovery will be clearly evident in the second half of the year. Moreover, he believes A-shares and Hong Kong-listed mainland companies have, on average, attractive valuations.
Yu uses a bottom up stock selection approach and he favors sectors with revenues driven by domestic demand. “Companies that exhibit healthy business normalisation from the public health crisis and have long-term resilience are also in favor,” Yu said.
He is overweight on new economy sectors such as internet, healthcare, electronic vehicle component makers and the 5G-network.
“Asian countries, including China, have the largest number of internet users and China is the home for several internet giants, such as Alibaba, Tencent and Byte Dance, all of which keep expanding their business,” Yu said.
However, China faces significant headwinds to technology development. The US-China conflict involving Hua Wei has impacted that company’s efforts to sell its 5G systems in the West. China has also been setback in trying to boost semiconductor production. US chipmaker Global Foundries has recently shut its massive joint venture semiconductor factory in Chengdu, which never ramped up.
Turning to the healthcare sector, Yu believes the pharmaceutical industry in Greater China is in the beginning stages. “As of the end of September 2019, the industry accounted for only 6% of A-shares, and there is huge room for future development.”
Yu manages the Chinese Mainland Focus Fund, which was launched in 2003. In 2020, the fund has returned 8.31% year-to-date, outperforming the benchmark, MSCI China (-1.61%) and its sector (-2.39%), according to FE Fundinfo (three-year chart below).
The top ten holdings include Alibaba (6.7%), Tencent (4.3%) and Gree Electric Appliances (4.3%), according to its factsheet.
“One reason that why we invest more in Alibaba than Tencent is that the Alibaba’s valuations are cheaper,” Yu explained.
“Another reason is that Tencent has benefited much from the coronavirus as many people stay at home playing games. Later, Tencent may have more pressure on their business,” he added.
Old economy
At the same time, the firm is underweight the financial sector, including banks, insurance and securities, as well as the commodities sector.
“For banks, in an interest rate cut environment while the economy is under relatively high pressure, there could be bad loans in the future,” Yu said.
Insurance has the nature of a consumption play, and when people are worried about the economic recovery, the need for insurance would be reduced, he said.
In terms of commodities, Yu noted that steel, cement and coal are in overcapacity in China.
“China’s infrastructure construction is already good enough and there is not much need for new railways and highways in many places,” he said.
Regarding risks, Yu mentioned that in the next six months, the high valuations of certain A-shares, such as tech and semiconductor companies, is a concern.
The Chinese Mainland Focus Fund vs category average and benchmark
