Global investors might switch their capital back into Asian markets, particularly China, in the second half of 2014 as the US economic recovery is not strong enough to justify the high valuations on Wall Street, a veteran investor said.
“Developed markets would continue to dominate in the first half of the year, but in the absence of sales pick-up, global investors might switch back into Asian market in the second half,” Robert Rountree, global strategist at Eastspring Investments, told the Hong Kong Economic Journal’s EJ Insight.
“The valuations of US equities are almost back to historical high, but the economic growth is not on a strong trajectory,” Rountree said in an interview. The recent “bounce-back in earnings is due primarily to cost cutting and buy-back of shares” and not due to revenue gains, he noted.
In the mean time, investors have “over discounted” the huge uncertainties as China undertakes economic restructuring, said Rountree, who has over three decades experience in the financial markets.
“The decisions that China is making are so huge and it takes a lot to understand. The market has overreacted to the uncertainties due in part to the opaqueness of the system,” he said, adding that investors should add some cyclicals to their portfolios to reap huge gains amid quick market recovery.
Investors should ask themselves if things in China are so bad to warrant the current cheap valuations, Rountree said.
Chinese shares are trading at around 8.6 times 12-month forward earnings, 28 percent below the long-term mean of 12 times, according to data from Nomura. The benchmark Shanghai Composite Index has lost almost 7 percent last year, putting it among the worst-performing markets globally. The US market, in contrast, jumped nearly 30 percent in 2013 while Japan notched an astonishing 57 percent gain.
IPO resumption won’t drain capital
With Chinese authorities reopening the initial public offering (IPO) tap after a 15-month suspension, mainland equities have come under some fresh pressure in the new year. The resumption of listings in a flagging market is seen by retail investors as a high-wire act and many say they would rather stay on the sidelines.
Nevertheless, Rountree dismisses the traditional wisdom that IPOs would drain capital out of the market. Instead, he noted that companies usually seek public listing when the market appetite for new shares is high. The IPOs won’t drag out “existing money” but instead pull in “new money” into the market, contrary to the general fear, he said.
“I disagree with the common perception entirely. It’s the other way around,” he said.
The China Securities Regulatory Commission (CSRC) reopened the initial public offering market late last year, setting the stage for a renewed wave of fund-raising by mainland firms.
As a bottom-up value investor, Eastspring Investments is highly exposed to cyclicals like oil and gas firm CNOOC Ltd. (00883.HK), as well as building materials, industrials, financials and consumer discretionary plays. Wumart Store Inc. (01025.HK) and Travelsky Technology Ltd. (00696.HK) are among the consumer picks. Meanwhile, internet giant Tencent Holdings (00700.HK) is not in the firm’s portfolio as the counter’s valuations are deemed a bit excessive.
A contrarian approach has worked extremely well for Eastspring in 2012 when it went overweight on Spain and Italy, while everyone else was fleeing for safety. “We take pain for gain,” Rountree said.
Eastspring, a unit of Prudential Corp Asia, is one of the largest asset mangers in the region. It had about US$94 billion in assets under management as of end-June last year.
Rountree says he is overweight Chinese market in his personal portfolio, with 35 to 40 percent exposure to Greater China.
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