Investors might feel uneasy putting money in China as growth has cooled, but Eastspring Investments manager Andrew Cormie thinks the country will make it through the slowdown and that its financials sector continues to offer opportunities.
‘We’re in the muddle through case. We think the economy muddles through and survives and there isn’t a big dislocation in the economy,' said Cormie, the firm's global emerging markets and Asia Pacific equities portfolio manager.
A value investor, Cormie runs the $2.5 billion Eastspring Global Emerging Markets Dynamic Strategy fund, which is 67.5% invested in Asia.
China ranks as its top country holding with a 25.7% allocation, with companies such as China Construction Bank and the Industrial and Commerce Bank of China among the fund’s top 10 holdings.
‘Within China we’ve particularly liked financials,’ Cormie said. ‘Small banks will most certainly get in trouble but large banks are high quality companies.
‘They are generating great returns but selling cheap because of concerns about the Chinese growth environment and the amount of leverage in the economy,’ Cormie said.
The Chinese internet services juggernaut Baidu also features in the fund’s top 10, though Cormie said internet stocks are too expensive at the moment. As of March 31, the fund he runs wasn’t invested in popular Chinese tech companies such as Tencent Holdings and Alibaba Group.
Besides China, Cormie has found opportunities in South Korea, where he has allocated about 19% of the fund.
‘Korean banks have become much friendlier to minority shareholders and that’s being slowly recognized,’ he said. ‘They’ve tried to do it in the past and failed so people are a little bit cynical. We think that they will get there and that makes them attractive.’
Overall, the fund Cormie managers was overweight financials at 25.6%, underweight IT stocks at about 19% and overweight consumer discretionary at 14.7%.
The past three years have been rough for the fund, as it has returned 0.54% while its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, has risen 2.21%.
In 2016, however, the time seemed to turn as markets improved and value stocks snapped back. The fund returned 1.01% compared to its Citywire benchmark, which rose 0.29%.
Investors have grown interested in global emerging markets, including Asia, as they have said US equities have become expensive.
In Latin America, for example, Chile's six pension funds had close to 20% of their $62.7 billion foreign allocation in Asian equities, surpassing their investments in the US by almost $1 billion.
‘There’s a natural economic tie between LatAm and Asia [...] due to trade, but also understanding of the local markets,’ said Jeffrey Smith, Eastspring’s head of the Americas.
‘If you look at the relationship between Chile and China, it’s remarkable. Chile is one of the largest copper producers in the world. China is one of the largest consumers of copper in the world. That kind of relationship is already pre-existing,’ he said.
The company is targeting institutional investors in Colombia, Chile and Peru with single-country strategies, such as Japan and India funds, and with Pan-Asia funds, Smith said.