Man Group Plc expects Asian stocks to outshine other regions next year as softer inflation and the end of an earnings downgrade cycle set the ground for an early rebound.
Within the region, the hedge fund giant is betting on defensive stocks in India and Southeast Asia while cautioning that equities across northern Asia remain more vulnerable to trade headwinds and the economic slowdown in China.
“A lot of the problems the west is dealing with right now around speculative bubbles, over-stimulus, inflationary pressure and scarcity of labour -- all these factors don’t exist in Asia,” said Andrew Swan, head of Asia ex-Japan equities at the Man GLG unit of the London-based asset manager. “The foundations are much stronger now in Asia than in other markets.”
Asia’s equity benchmark has slumped nearly 20% in 2022, on track to underperform US and European peers for a second year. The region’s heavy reliance on China has made stocks vulnerable to the fallout from the country’s Covid lockdowns, while the Federal Reserve’s tightening has triggered outflows from emerging markets. The gauge has fallen more than 3% this week, set for its worst showing since June.
On the flip side, inflation in Asia has been more moderate thanks to fewer asset bubbles, allowing regional central banks to take a slower rate-hike path. And with the region’s earnings downgrades around “75% of the way through” versus “still early stage” for developed markets, they can get through this slump quicker, according to Swan.
Forward earnings-per-share estimates for the MSCI’s Asia benchmark have slumped about 9% from a March high, while those for the S&P 500 have gained during the period.
Swan said the firm has been running deeply defensive strategies since mid-last year on bets that Asia -- in particular China -- will disappoint. He declined to comment on specific funds during the interview. His long-only US$54 million ($75.6 million) Asia ex-Japan equity fund has returned about 7% over the past three months, beating 99% of its peers, Bloomberg data shows.
Man Group has increased exposure on China within its Asian portfolios since the March rout, after being negative on the market for two years.
Swan remains cautious on going outright bullish on China as the country adheres to Zero Covid policies and undergoes restructuring in sectors like property.
Still, he sees opportunities in stocks that have been hurt but can deliver good results in the coming years, and has Tencent Holdings Ltd. as the second-biggest holding in his Asia investments.
A near-term game changer could be a breakthrough in China’s homegrown vaccines, which would enable the nation to open up to the rest of the world, according to Swan.
South Vs North
Heading to 2023, Man Group continues to hold confidence in South and Southeast Asia over their northern neighbours. That comes after benchmark indexes for Indonesia, India and Singapore remain the only ones in the green in Asia this year.
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“North Asia is more impacted by China,” he said. “‘Whereas Southeast Asia, including India, is more driven by domestic demand. And that’s been pretty resilient this year.”
On sectors, he remains overweight defensives such as healthcare, communications and financials, and shuns cyclicals like technology and consumer discretionary.
“We’re not necessarily seeing a high growth environment returning anytime soon, but with a more stable environment, there’s opportunity.”