The case for investing in Asia right now

It looks like we’re approaching peak pessimism on China — which could mean it’s time to lift portfolio exposure to Asian shares, argues Pendal’s SAMIR MEHTA

• China’s economy drives Asia’s markets
• Maximum pessimism reached
• Find out about Pendal Asian Share Fund

SIGNS that investors are approaching maximum pessimism on the Chinese economy could indicate it’s time to lift portfolio exposure to Asian shares, argues Pendal’s Samir Mehta.

Most of Asia’s sharemarkets have fallen heavily over the past 12 months on a combination of rising interest rates, higher inflation and escalating geopolitical concerns.

China’s economic outlook has also been a key cause of the declines across the region, as Beijing takes steps to strengthen regulations governing the property sector and lift oversight of the operations of its big technology companies, says Mehta, who manages Pendal’s Asian Shares Fund.

“Pessimism is now embedded in stock prices, and that’s why I’m turning a little bit more positive on Asia, because if China does well, you could start to see things turn up for the region,”

Mehta says this kind of contrarian view on Asia has the potential to deliver gains even if global markets fall, echoing this year’s sudden reversal of fortunes for coal and gas companies as the rest of markets struggled.

“The simple tagline is that China is like another ‘anti-ESG’ portfolio. Back in 2021, ESG was so entrenched that ‘anti-ESG’ stocks like fossil fuels became very cheap and investors were bidding up anything ESG compliant no matter the valuation and no matter the future risks.

“Those risks became manifest in 2022 — everything that was ‘anti ESG’ had a really big bounce, energy and commodities in particular.

“My sense is that China is at a similar stage with negativity now manifest.”

Three positive signs for China

Mehta says three signs indicate China’s economic prospects may be on the mend.

First, the recent profit season saw improving fortunes for bellwether companies. Food delivery giant Meituan posted better than expected earnings while results at gaming giant Netease were good.

On the other hand, poor results are not being treated with big sell-offs — restaurant chain Haidilao has suffered from COVID lockdowns, but its stock rose after weak results on a plan to reorganise the business and reduce restaurants and staffing.

“So, we have results that are not meeting expectations, yet the stocks are higher. And we have some results that are better than expected. These are the initial stages of what looks like sellers’ fatigue.”

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Mehta says there are also hints that President Xi Jinping might loosen up on COVID restrictions once he is confirmed for another term in October, using Hong Kong as a test case.

“I don’t have a crystal ball but there are rumblings around Hong Kong where leaders are talking to the neighbouring provinces as to how do they work with opening up a little bit more.”

Mehta says a signal for investors will be if Xi personally attends November’s G20 meeting in Indonesia.

“Xi leaving the country would be a big statement,” he says.

Mehta says a third positive for investors could be a shift in government policy to stimulate the economy.

“There’s a big rise in youth unemployment in China and social stability for the Chinese is going to be a very important point for Xi after he becomes president for a third term.

“There are real issues that the economy is facing, and therefore his motivation will turn away from cementing power to trying to make sure that they don’t have to deal with social problems.”

And finally, investors’ concerns about tension in Taiwan might be overstated, at least in the short term, says Mehta.

“The experts think that the Chinese navy is just not ready for an invasion by sea that would be multiples of the complexity of the Normandy landing — the Taiwan strait is significantly larger than the English channel.”

Instead, Mehta says investors should consider the prospect of Xi biding his time for a decade or more.

So, what are the risks?

Mehta says the US dollar will remain strong as the US Federal Reserve battles inflation, creating capital outflows that put pressure on Asia’s economies. High commodity and oil prices are also a structural headwind for Asia.

“But barring a real accident, which is possible, the negativity is now manifest in China and the rest of Asia. That means it makes strategic sense to start to allocate capital to Asia.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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