Growth in the Asia Pacific region, most notably China, has slowed lately from its erstwhile torrid rate, prompting widespread fears that the slowdown may jeopardize any global economic recovery. However, William Lam, co-manager of the Invesco Indo-Pacific Fund, believes the current phase represents a necessary adjustment, and good investment opportunities still abound.
“China is very interesting,” says Lam who co-manages the fund along with Paul Chesson, Stuart Parks, and Tony Roberts, all of Invesco Perpetual, based in Henley-on-Thames in the U.K. “Their historical double-digit growth rates were simply not sustainable, and the current seven- to seven-and-a-half-percent growth rate isn’t sustainable either. But the government there is concerned that growth doesn’t fall too quickly, because that would mean job layoffs, so they want to manage a soft landing. That’s a crucial point – the economy there is controlled by the government, and the government does have the power to avoid a hard landing because they can pump in as much liquidity as is required. In [Western] markets there isn’t the same control.
Bad news is good news for stocks
“China is actually in a period where bad news is good news for the stock markets,” Lam adds. “If the economy slows too much, the government has to do more to maintain growth, which means they’ll need to pump more liquidity into the market. It’s a push-and-pull situation for fundamental investors, where slowing growth is not good news but the government’s response is good news.”
Old China, New China
Lam also points out that while the big news about China lately has been about the slowdown in its massive real estate and infrastructure spending programs, with consequent deleterious effects on commodity markets worldwide, there have nevertheless been significant investments in other areas of the economy, resulting in a dichotomy. “You have to make a distinction between the “old” China and the “new” China,” he says. “Everyone is aware of the slowdown in infrastructure spending, but that’s part of the old China.”
The new China has become more focused on consumer-oriented segments of the market, notably high-tech, and it has been doing well lately too. This has not been as obvious to investors, however, because many of the big successful firms in this sector have chosen to list their companies on U.S. stock exchanges rather than Chinese ones. “New China stocks like Alibaba Group Holding Ltd. (NYSE: BABA), NetEase Inc. ADR (NASDAQ: NTES), and Baidu Inc. ADR (NASDAQ: BIDU) are listed in the U.S., so they don’t appear in benchmarks like the MSCI Asia Pacific Index,” says Lam. “But now MSCI has indicated they’re putting these stocks back into the index.”
This change should help foster awareness of the newfound direction of growth in the country, although Lam adds that parts of the old China still merit consideration too. “It’s a contrarian situation, where the demand side has been weakening, but the supply side is responding,” he says. “For example, they’ve been closing down some the old inefficient steel mills, so productivity is improving.
Consequently, Lam is bullish in the new China but he’s keeping a foot in both camps. “We’re now 50/50 between the old and new China, and we’re still bullish overall,” he says, adding that the fund is currently overweighted in China.
Bullish on Japan
As for elsewhere in the east, the fund has pulled back to a neutral position on Japan in recent months, but Lam explains that this is because valuations have risen there to the point that they’re comparable with other Asian countries, rather than because the island’s outlook has soured. “The opportunities are now roughly equivalent, so we’re bullish both on Japan and ex-Japan.”
India is a slightly different story, again because of prices. “This market was most positive in 2014 because of the election [of prime minister Narendra Modi, who worked economic wonders in Gujarat as chief magistrate], but the question for investors is what to do from here,” says Lam. “We’re now underweighted in India because it’s become the most expensive market in the region, and that probably is not going to change soon.”
As of the end of December, the fund’s top three largest weightings geographically were to Japan (38.6 per cent), South Korea (13.4 per cent), and China (13.2 per cent), with 25.6 per cent in financials, 20.4 per cent in information technology, and 17.4 per cent in industrials. Top equity holdings included NetEase, Samsung Electronics Co. Ltd. (KRX: 005930), Honda Motor Co., Ltd. (TYO: 7267), and Mitsubishi UFJ Financial Group, Inc. (TYO: 8306). The fund also had a 5.8 per cent weighting to cash.
Award-winning performance
As of the end of December, the fund had posted a 3-year average annual rate of return of 15.9 per cent, handily outpacing both its benchmark at 14.9 per cent and its peer group index at 11.8 per cent, contributing to the fund’s FundGrade A-Grade rating and its Fundata FundGrade A+ Awards for 2013 and 2014. The performance does come at a price, however, with MER for the fund at 2.98 per cent, and Prospectus Risk showing as Medium to High. Minimum initial non-RRSP investment is $500.
— Courtesy Fundata Canada Inc. © 2015. Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library. Investments mentioned are not guaranteed and carry risk of loss.
