This week’s sharp sell-off in Asian equities was long overdue, say investment managers, who see further large drops as relatively likely. They are waiting to see just how far prices fall before moving to buy cut-price shares.
Chinese and Japanese financials and Taiwanese technology names are some of the areas being tipped for consideration. But the Chinese internet giants will have to slide further before becoming attractive, investors told AsianInvestor.
The MSCI Asia Pacific index has shed 3.5% since Friday, with stock markets across the region dropping sharply yesterday, taking their cue from the recent dramatic pullback in US equities. China’s composite CSI300 slid 2.9%, Japan’s Nikkei 225 fell 4.7%, andi Hong Kong’s Hang Seng lost 5.4%.
This has come after the MSCI Asia Pacific rose 32% last year, during which time the biggest decline was just 5%, said Richard Titherington, chief investment officer of emerging market and Asia-Pacific equities at JP Morgan Asset Management.
“If you look at bull markets through history, they’ve seen corrections of anywhere between 10% and 30%,” he told AsianInvestor. “I think this [correction] will probably go a bit further.
“It’s a surprise it didn’t happen at some point in 2017,” added London-based Titherington. “For the past six months, we’d been saying a sell-off was likely at some point, and we were wrong. Clearly what we’ve seen is a long overdue selloff, and the catalyst was rising interest rates.”
MARKET STRUCTURE CONCERNS
Michael Kerley, director of Asia-Pacific equities at Janus Henderson Investors, agreed further falls are certainly possible, especially given the structure of equity markets these days.
“The amount of passive money in markets … and the amount of electronic trading -- these could potentially trigger far greater moves than fundamentals would suggest,” said Kerley.
He was referring to the fact that algorithmic trading and passively managed strategies tend to have automated allocation processes based on pre-set rules or indexes.
“None of us [in the traditional long-only investment segment] knows where the cutoffs are for these kinds of trades,” added Kerley. “If we get another 5% move higher or lower, what does that trigger?”
Ultimately, he pointed out, economic fundamentals are positive: “We’re still getting decent earnings recovery.”
Kerley said he remains positive on Asia, but that his concern is what happens elsewhere to impact the region. “That will be a function of interest rates, liquidity, inflation and central bank policy. In Asia we don’t have control over any of that.”
A positive sign for the moment is that mutual fund investors are not panicking yet, said Titherington and Kerley.
The biggest outflow from any of JP Morgan AM’s Asia and global EM funds has been less than 2% since the selloff began, said Titherington. And Janus Henderson has had no withdrawals as yet from the Asia dividend income fund that Kerley runs, he told AsianInvestor.
However, warned Titherington, the situation could change, if there were to be another week of further declines and increased volatility.
Still, once the dust settles, there will at least be cheaper stocks to be had.
“We haven’t done anything very much over the last couple of days,” said Titherington. “We don’t think it’s wise to plunge in. Where we see stocks that continue to look expensive, we’ll look to reduce them in favour of things that start to look more attractive. “
However, he pointed to substantial selloffs in the tech sector, most notably in Taiwan, and in some Chinese financials. “We’ll look to rotate into those kind of areas and see how the market plays out over the next week or so,” he noted.
Moreover, richly valued Chinese internet stocks such as Tencent and Alibaba could become attractive if they fell further, said Titherington.
Tencent has fallen around 7% from its peak. By JP Morgan AM’s analysis, last week the stock's expected five-year return was around 9%, whereas 12 months ago it was more like 20%, said Titherington. Today the its expected return is just above 10%; if it rose to 12% or 13%, that would be a decent buying opportunity, he noted.
Janus Henderson’s Kerley is less keen on tech names. He said his firm had been looking at financials, industrials and consumer discretionary in Asia. “I think they’re much better suited to this point in the cycle than some of these richly priced growth stocks [in the tech sector].”
Meanwhile, Steven Andrew, fund manager on the multi-asset team at M&G Investments, feels the Japanese banking sector looks particularly attractive. Prices have returned to levels similar to those at the start of 2017 and valuations look compelling, he noted.