Investors should move back into Asian equities via long/short strategies, in light of low price-to-earnings and price-to-book ratios in certain markets, says William Ma, chief investment officer of Shanghai-based wealth manager Noah Holdings.
“It’s time to get our feet wet again,” he said, suggesting starting out with one-third of the target allocation, and raising from there. He is positive on Asian emerging markets, but less so those elsewhere, such as Brazil and Russia.
“Of course it’s easier to wait and see, but as the market has been quite panicky, I think a lot has been priced in already,” Ma noted. “We’ve seen EM outflows for two to three years and people’s allocation to emerging markets is close to zero.”
He argued that pan-Asia equity long/short would outperform this year, driven by markets such as India and Vietnam, whose stock indexes have both dropped significantly in terms of price-to-earnings. Yesterday India’s Sensex stood at 18.1x P/E, down from a high last year of 22.5x on July 22, and Vietnam stocks at 10.4x, down from 12.9x on June 5.
To a lesser extent he thinks Hong Kong's Hang Seng Index will also rally, as its P/E ratio stood at 8.3x yesterday, down from 11.6x on April 27 before the market crash.
Valuations are also way down from a price-to-book perspective, said Ma. Hong Kong stocks stood at 1.02x P/B yesterday, making it the cheapest equity market in the world apart from Russia, he noted. That is down from 1.55x on April 27.
Likewise, Indian equities stood at 2.62x P/B yesterday, down from 3.07x on June 25, and Vietnam stocks at 1.59x, down from 1.94x on July 27.
The potential for increased capital flows from China will have a major impact on Asian stocks, particularly in the next three to five years as the mainland allows more outbound investment, Ma said. “Institutional and retail money looking for opportunities will look to draw on Chinese history and the Chinese growth story,” and Asia is likely to be the first stop.
Another factor behind growth in Asian equities will be the steady shift of industrial manufacturing from China to other countries in the region, due to relatively higher mainland wages these days. He pointed out that 80% of Intel’s computer chips are now produced in Vietnam.
Ma would rather buy equities than fixed income in Asia now to gain exposure to companies benefiting from the economic recovery. And he prefers long/short and currency-hedged strategies for the coming year, in order to avoid losing money. Most Asian currencies are expected to weaken against the dollar in 2016, apart from the Indian rupee, according to Bank of America Merrill Lynch.
A Hong Kong-based hedge fund selector at another wealth management business is also more positive on long/short equity than most other hedge strategies, on a global basis.
“Given central bank policies – particularly in China, the US and Japan – we are neutral to constructive on equity long/short globally,” he said, citing “reasonable” valuations in selected EM and Asian countries.
“There are stock-specific opportunities on the long and short side, which will provide fertile ground for stock-pickers when the market refocuses back from macro factors to fundamentals,” added the executive.
Issues such as central bank policy divergence, the China slowdown and renminbi volatility will continue to create equity-market headwinds, he noted, which makes him favour market-neutral strategies as opposed to long-biased portfolios.
Meanwhile, Japan is another market that Ma is positive on, arguing that this year may well be better than 2015 for activist hedge funds, which had returns “in the low teens” last year against a 9% gain in the main stock market. He said there had been a “paradigm shift” in corporate governance in Japan in recent years, and these changes need time to be implemented.
Strong performance of Japan managers last year was driven by a focus on large-cap companies benefiting from increased flows into stocks from the country’s Government Pension Investment Fund. “But I think more discretionary managers will now look for companies boosting their return on equity beyond simply having strong cashflow and earnings quality.”
The Nikkei 225 gained 9% last year, although it has since given up those gains, having fallen 10% since December 30.