Portfolio Chart: A menu of options as bond yields reset higher
With yields hovering close to decade highs across many fixed income sectors, investors are presented with a “menu of options”. Still, selectivity matters as recession risks loom.
In the second of a two-part series, our investment team shares their views on the three near-term sectors of focus in China equities.
We believe that taking an active, longer-term focus and bottom-up stock picking approach could help identify quality corporates, and capture opportunities in China’s equity markets.
With the changing regulatory landscape and sector dynamics in China equities, we believe that some corporates, which may benefit from an economic turnaround, could present opportunities either from an earnings recovery or a potential valuation re-rating.
3 near-term sectors we are focusing on1
1. Consumer staples
Amid sharply higher raw material prices, many consumer businesses suffered from a margin squeeze in 2021, leading to earnings downgrades.
As anticipated, towards the end of 2021, a number of industry leaders announced price hikes, ranging from condiment manufacturers to other food and beverage makers. Over time, their strength in brand power could help some quality companies navigate the material-caused inflation and regain higher levels of profitability. We are looking out for signs of margin and earnings recovery in 2022, especially in mid/downstream businesses.
2. Real estate
Within real estate, there has been a notable U-turn in the industry landscape by giving developers improved access to onshore capital markets, loosening purchase restrictions locally, and delaying the expansion of a property tax pilot programme in 2022.
Within this segment, we prefer to focus on names that come with their own structural drivers. For example, property management companies, or consumer companies such as furniture or decorative paint which are consolidating the market, and hence decoupling from the underlying property cycles.
3. The internet
After more than a year of regulatory reset, the markets are expecting the policy focus to shift from ‘announcement’ in 2021 to ‘implementation’ in 2022. Again, an improvement in sentiment should be supportive of valuation re-rating. We believe the better quality internet companies could remain robust operationally and financially, with long growth runways.
We believe that active management remains crucial for onshore and offshore China equities, and the key potential secular growth opportunities would continue to resonate.
Leveraging our on-the-ground research which focuses on company fundamentals, our investment professionals integrate bottom-up stock selection with structural themes, seeking to capture opportunities with long-term growth potential.