Milltrust Focuses on Asia
“Stay overweight Asia”. That is the latest message from Eric Anderson, Head of Emerging Markets at Milltrust. After witnessing a 40% rally in EM equities after declaring at the end of March that it was one of the “best buying opportunities in decades”, Eric continues to see strong upside in Asia for the rest of the year, particularly across China, South Korea and Taiwan. He recently said in a note to clients that, “China’s economic momentum provides a strong tailwind for EM growth, particularly those EM economies who have significant trade links with China”. On the often-discussed topic of valuations, Eric explains, “valuations are clearly stretched and, in many cases, already discount a solid recovery in fundamentals. This is clearly a high bar for companies to meet over the next 6 to 12 months which is why investors must continue to be very selective with their EM exposure and avoid the expensive names that will likely disappoint”.
Milltrust accesses the Asian markets for their clients through the Milltrust Emerging Markets Platform which houses country funds managed by locally-based specialist investment teams. These include strategies for China, South Korea, South East Asia, India, Brazil, Russia and Africa. The focus of these teams is to identify high quality, fast-growing companies in their respective region of expertise and build concentrated portfolios of best ideas.
The Shanghai-based China team who runs the China strategy on the Milltrust Platform helped address some key questions on the opportunity in China:
Question: What next, now that a V-shaped recovery is underway?
China team: Looking ahead, we believe the world’s second biggest economy will continue its recovery trend in 2H20 and should post a year-high quarterly GDP growth in 4Q.
This is already becoming apparent. China announced 2Q GDP growth of 3.2%, a significant improvement on 1Q’s -6.8% decline and well ahead of the consensus forecast of 2.2%. The better-than-expected 2Q was mainly driven by construction-related investment, which rose by 8% yoy for the quarter. Encouragingly, the decline in retail sales also narrowed to -4% for this quarter versus -19% for 1Q.
The rebound has resulted in a lot of liquidity domestically, and policymakers are taking actions to curb speculative activities in the interbank and property markets. However, we do not foresee any broad-based tightening. China is well aware that although it handled the pandemic well and has largely won the COVID-19 battle, the rest of the world is still fighting the virus which presents significant risk.
Question: Is the July consumption soft patch a concern?
China team: Many consumer companies did observe slightly weaker recovery momentum in July versus June, as a result from both strong front-loaded demand in June on the back of the ‘6.18’ online shopping festival, and the heavy rains and floods that affected many regions in China. We are therefore not that concerned that the weakness in June indicates a change to the retail recovery pattern. Our interviews with brands, distributors and retailers suggest they are reasonably confident in a rebound in August and believe the recovery momentum to continue into 4Q, with innovative marketing efforts such as live streaming are likely to lead to better consumer engagement.
Question: Will the earnings season prove to be a positive catalyst?
China team: Although some companies we own are likely to report YOY earnings decline for 1H20, we are of the view that interim earnings will be a non-event for these names. The market has already been looking past 1H20 and regarding COVID-19 as a one-off event. The focus has shifted to FY21 earnings. This is evident from the fact that most of the consumer stocks, including well known consumer brands such as Mengniu Dairy and Haidilao, saw share price gains after issuing 1H profit warnings.
Against this backdrop, it should come as no surprise that companies who are able to deliver strong 1H results should see meaningful share price reaction.
For more information on the Milltrust Emerging Markets offering, please contact the Emerging Markets team at [email protected]
