Active Thinking

At GAM Investments’ latest Active Thinking forum, David Dowsett reviews the latest market developments while Jian Shi Cortesi explains why she is excited to talk to investors about China and Asia as an investment opportunity as clear signs of recovery have begun to emerge.

26 January 2022

David Dowsett, Global Head of Investments

Overall, markets are holding their gains, despite an attempt at a pullback in the middle of the week, although this did not get very far. There is still a lot to focus on going forward but overall markets continue to trade in an encouraging fashion. We continue to see the outperformance of non-US assets, which is a key theme of investor debate, and we are seeing a change in investor flows. Last week, the market saw the first inflow into European equities after a 48-week outflow period. Last week also marked the biggest week of inflows on record for emerging markets (EM) fixed income and EM equities combined.

From a central bank perspective, we are beginning to see a divergence in interest rate intentions. The Federal Reserve signalled over the weekend that it will only raise interest rates by 25 bps at the next meeting and perhaps that will mark the end of the hiking cycle. By contrast, the European Central Bank, in my view wrongly, is still quite firmly signalling two further 50 bps hikes. From a currency standpoint, which is driving a lot of interest in non-US assets at the moment, this is positive as it suggests more interest rate support for the euro and, more importantly, less on a relative basis to the dollar; reversing a key theme that drove markets in 2022. So I think that is something to focus on and indeed the US GDP and core PCE data released this week will be important.

This week is also important for earnings releases in the technology space. There have been a lot of headlines about job cuts from technology companies over the past 10 days, as well as the banks. Microsoft earnings were released on Tuesday and Tesla’s earnings on Wednesday. Those mark important earnings tests for the US market into the end of this month.

Jian Shi Cortesi, Investment Director, Asia and China Growth Equities

The Chinese New Year heralded in the year of the rabbit this weekend and many hope that this will bring prosperity and some tranquillity. We are excited to talk to investors about China and Asia as an investment opportunity, particularly as clear signs of recovery have begun to emerge. With the combination of attractive valuations and the macro scenario turning positive, we believe we have a strong story to tell investors.

When is it a good time to buy China and Asia?

A good time to buy China and Asia equities is always at the lowest point when there is most concern. We have seen a recent rebound, but from a longer-term perspective, looking at the MSCI China and how dramatic the last two years of pullback has been and how it compared to the previous bottom, we believe there is still a lot of upside left in China and Asian equity. Despite the recent rebound, the MSCI China Index is still 45% below the previous peak and it is a similar story for Asia.

In October last year, the MSCI China Index, with technology and internet names accounting for approximately half of the index weight, was trading below one times price-to-book. This is indicative of how attractive China’s stock market has become. Indeed, it is lower than the Global Financial Crisis in 2008 and all the previous bottoms. In October and November 2022, international investor sentiment towards China was the most pessimistic it has been in the last 20 years, in our view.

What are the key drivers for China and Asian equities?

The three negative factors that punished China and Asia equities last year are all starting to turn positive.

1. Covid - Last year, China’s Covid restrictions resulted in the Chinese economy performing below its potential. Now, China is exiting Covid and most people have already been infected, recovered and are back to work. Chinese tourists are already leaving China and going to other countries so we expect to see a very strong recovery. Having seen other countries rebound economically after exiting Covid, we believe we can expect the same for China.
2. Interest rates – Last year many Asian countries raised interest rates. On the one hand, the rate rises are to fight domestic inflation. On the other, they are helping to stabilise the forex exchange rate. We are now beginning to see some of these countries getting to the end of the hiking cycle or even some which might have already finished it.
3. The US dollar – When the US dollar is very strong, that is typically when risk appetite is low, especially for non-US assets. A strong US dollar depressed the appetite for Asia fixed income and equity. Now we are seeing the US dollar pulling back and in turn, an increased demand for Asian equity.

On the negative side, many Asian companies are concerned about global demand as we have seen forecasts of macro weakness in Europe, and potentially weaker demand for the US which could negatively impact Asian exports. However, overall, there are a lot more factors turning positive that could support Asian and Chinese equity.

Where do we see investment opportunities?

China reopening beneficiaries – Companies such as those in travel or sportswear stand to benefit. When Chinese consumers were surveyed about the three things they want to do the most following Covid, people said: exercise outdoors, travel and eat at restaurants. Furthermore, in the last three years, we have seen a strong increase in household deposits. People’s savings have been rising and been stored up in the bank. Once released, that money with either go into consumption or into investment, for example in the stock market or maybe people will start buying housing.

Beaten down growth names – Asian growth stocks have fallen, with large caps down 80%, while small caps are down 90-95%. We still perceive lots of misconceptions in the market. Misconceptions create mispricing and mispricing creates investment opportunities. On the technology hardware side, some of the semiconductor names and technology hardware companies have been performing poorly as the demand in tech has weakened. This year, we are seeing various signs that the sector could bottom out and so we believe that this year, we will also have many opportunities to play the recovery in this sector.

Asian renewables – We recently saw some slowdown in the renewable sector, for example in the solar sector, where polysilicon prices have been falling and some of the stocks have also corrected. We think that this year, we will have opportunities to buy into some Asian renewable names at low prices.

Regarding GDP growth, over the long-term GDP will continue to decline because of its sheer size. In our view, China is similar to a middle aged person. Previously, China was a teenager that could grow fast, now it is a 30-40 year old and cannot grow that fast. In the next 10-20 years, we expect Chinese GDP growth will trend toward 3%. But this year we will have a rebound because of Covid and because of the low base. Over the long-term, strong GDP growth will depend on industry policy. A decade ago, China was making shoes and socks, but is now making computers, smartphones, electronics and electronics parts. In the future, China will compete in higher end products, such as medical devices, electric vehicles and clean energy products. As China moves up the value chain, that is where the next pillar of growth will come from.