HONG KONG: China may be an odd choice for investors seeking shelter from a Sino-US trade war. Yet, money managers in Asia are pouring funds into Chinese stocks as the long-term promise of a growing middle class trumps more immediate fears about tariffs.
It is also a vote of confidence in Beijing's aggressive policy response to a festering Sino-US trade standoff which has hurt its economy, unsettled world financial markets and triggered fears of a global recession.
The anxiety has forced investors into defensive holdings such as the safe haven yen, gold and US Treasuries.
Paradoxically, for China, the rising US import barriers have an upside as they inject impetus to the shift in its economy from an investment-driven growth model towards one led by consumption and services. And, the nation's 400-million-plus growing middle class provides a major attraction for fund managers.
"Owning domestic-focused names in China has been successful in 2019, even with all the noise around trade tension, weakening macro and the magic '7' level for the renminbi," said Sat Duhra, a portfolio manager for Janus Henderson Investors' Asia ex-Japan Equities strategy.
"Names in the sportswear and beverage sectors have performed well as trade issues have not impacted them and their strong branding and high margins have attracted investors looking for less cyclical and global trade exposure," Duhra said.
Domestic consumption already drives just over 75 per cent of China's annual economic output.
In an effort to revive its US$14 trillion economy, China has pumped cash into banks, fast-tracked infrastructure spending and rolled out tax cuts worth trillions of yuan to support consumers and businesses. And, it has said it could do more.
Local governments have chipped in. Guangdong Province last month rolled out 29 measures to boost consumption, including relaxing restrictions on auto purchases.
SAFE, BORING, DEFENSIVE
Consumer shares have been relatively unscathed, even as escalating trade tensions wiped out 11 per cent of the main Shanghai stock market since mid-April, though the market is still up 17 per cent year-to-date.
The Chinese consumer staples index has jumped almost 50 per cent so far this year whereas its information technology companies index has climbed over 24 per cent, tracking the rise in the benchmark CSI300 Index.
CSI300 has risen 22 per cent in the same period, outpacing the 6 per cent gains in the MSCI Asia ex-Japan index and the 15per cent rally in the S&P 500.
Hot-pot condiment maker Yihai International, for instance, is already up more than 100 per cent this year after sky-rocketing 155 per cent in 2018. Shanghai-listed Tsingtao Brewery has risen over 30 per cent and Foshan Haitan Flavouring and Food Co has surged 51 per cent.
"We don't think the trade war will have much impact on the Chinese consumption space," said Robert Mann, a Singapore-based portfolio manager at Nikko Asset Management, who sees opportunities in China's service sector.
"More of what China is doing is helping consumption. So, that's one place to hide."
Khiem Do, head of Greater China investments at Barings, also expects the "safe, boring and defensive high-yielding stocks" from consumer staples to utilities to continue to outperform in China.
Pimco, which has US$1.76 trillion in assets under management as of March 2019, is betting on US Treasuries and Australian government bonds to take cover if the world slides into recession, but also sees opportunities in Chinese debt, said its co-head of Asia-Pacific portfolio management, Robert Mead.
None of the fund managers had recession as their base case scenario although most saw downside risks to growth and possibility the Federal Reserve would ease policy, an outcome that could hurt the US dollar and ultimately benefit Asian markets.
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The futures markets currently hint at nearly 100 basis points of rate cuts in the United States by September 2020.
Fund managers were also wary of a worse-than-expected Chinese slowdown or disruptions in global trade that would pose risks to the entire region. Which is why many of them were also squirreling away some money into markets such as Indonesia and India, nations less exposed to the vagaries of global trade.
For Dwyfor Evans, head of APAC Macro Strategy at State Street Global Markets, South Asia is the sweet spot as things get gloomy globally.
"The problem for North Asia is that they are so beholden to global conditions. That's less of an issue for India or Indonesia because they are less demand-driven," Evans said.
Both these countries recently re-elected their leaders, paving the way for long-expected economic reforms. India could additionally get a lift from lower oil prices in the event of a global recession.
For some, though, just sitting tight was the ideal approach for now.
"Keeping our powder dry and being alert to future opportunities seems the best strategy," said Mark Schofield, Citi's managing director for global strategy which has a 'modest overweight' for Asia-focussed EM equities.