7 stocks for when China's growth engine roars to life

I had the good pleasure of sitting down with Flavia Cheong, Investment Director at abrdn in October last year, to talk about the Asia-Pacific region, and the risks and opportunities therein.

At the time, Cheong was in Melbourne to promote the launch of the abrdn Sustainable Asian Opportunities Active ETF (Managed Fund) (ASX: ASAO), which offers investors easy access to the region’s growth potential.

Almost six months on, it was great to get Cheong’s perspective on the global economy, how things have changed since we last spoke, and the latest opportunities she and her team are focused on.

A changing landscape

Six months doesn’t seem like a long time but in the world of finance, it's an eternity. A lot has changed since we last spoke and Cheong is mindful of this, particularly with respect to US interest rates.

“The last time I spoke to you, I said consensus is for about 75 basis points of increases in rates in 2023. I think it's going to be steeper than that. 

And rates will stay higher than we expect for a longer period of time given the concerns around inflation in the US. I think that gives us some pause”.

Whilst the forecast for US rates has changed, Cheong notes that abrdn’s views around “the fundamentals within Asia still stand”.

US interest rates will impact whether markets are more risk-on or risk-off through 2023, and how abrdn pursues opportunities.

“If rates go up by 100 or 125 basis points, growth stocks will remain under pressure. As such, I would be quite cognizant of our growth exposure".

“We want to take opportunities when we see there's a correction and valuations are looking cheap. We’re cognizant in terms of where we are paying up, particularly when earnings growth is not evident in the near term”.

Reopening the key

When we last spoke, Cheong noted that reopenings (post covid) in Tokyo, Singapore and Thailand would provide a buffer for the APAC region should the US falter. At that time, China had not yet reopened either.

When asked about the importance of China reopening now that it is underway, Cheong provides her answer in the context of supply chains.

“The China story is important globally because a lot of the supply chains still sit in China. And the zero tolerance around COVID that they took on earlier in 2022 meant that the shutdowns caused substantial disruption to the supply chain”.

“The reopening of China and taking more relaxed views around shutdowns and lockdowns has helped the supply chain to normalise”.

And while Cheong notes that it will take some time for supply chains and built-up inventory to normalise via “inventory digestion”, the impact will play out in the results for quite a number of global companies over 2023.

Fund in focus 

When the Fund launched late last year, the portfolio was initially overweight Southeast Asian banks but that is no longer the case. 

“Going into the fourth quarter of last year, we had to re-look at our positions. While we had the view that China would reopen in 2023, the reopening came a lot faster than we expected”.

The speed of that movement created opportunities that Cheong and her team wanted to capitalise on, and the capital raised from selling the banks was deployed into Chinese internet companies.

“At the start of 4Q last year, with the Chinese market being down about 20-24%, depending on when you looked, there was value that was emerging in China”.

“We were then looking at relocating capital to China. And one of the areas that we reallocated capital to was in the Chinese internet space because it was looking very cheap. Valuations were very attractive”.

Cheong adds that there was greater transparency in terms of regulatory uncertainty within the internet sector, and that was one of the key drivers of the resurgent Chinese tech sector.

Tech talk

When it comes to tech stocks and the monster rally seen since October/November last year, Cheong notes that it is important to consider the various subsectors within the space.

She notes that whilst the portfolio holds a large absolute position (around 25% in tech names), “the active position we take doesn't necessarily reflect the absolute positions that you see in the fact sheet. If you were to break it up within China internet, we're probably slightly overweight”.

Cheong adds that the portfolio has continued to build its position in JD.com (NASDAQ: JD) (the largest retailer in China), as well as its position in Tencent (HKG: 0700). When it comes to semiconductors and names like TSMC (TPE: 2330), “we’ve reduced our position to semi”, notes Cheong.

“We felt that with very weak demand in consumer electronics, that's going to hit semis quite hard”.

As for the semiconductor exposure that the portfolio maintains, Cheong highlights LONGi Green Energy (SHA: 601012) and Silergy (TPE: 6451). LONGi manufactures solar modules, but it sits in the semiconductor space, whilst Silagy is a Chinese company that's listed in Taiwan. It makes power controllers, and yet it also sits in the semi space.

Cheong adds that a company like Silagy, while not a semi in the pure sense, will benefit from localisation and automation because a lot of the components that it makes go into equipment that's required for automation.

The other area that Cheong and her team have been heavily focussed on is China software services. She notes that with a change in policy from Beijing, there has been a lot of support around developing domestic cybersecurity software services.

The name she highlights in this space is Glodon (Shenzen: 002410), which provides software services for the construction sector.

“If you're thinking about the construction sector being more automated, about managing costs better, Gloden helps achieve this by reducing waste. 

As margins for real estate companies become more compressed, they'll be looking at ways to reduce cost, and Gloden will be able to provide that service through its software”.

Old economy

As a corollary to that idea, Cheong puts forward Kweichow Moutai (SHA: 600519) (Moutai a traditional style of Chinese baijiu liquor), the equivalent of Macallan Whiskey in China, as a way to play the burgeoning Chinese middle class over the coming decade.

Across all of these investments, Cheong is concerned about sustainable earnings growth and companies with a wide moat that provides more predictability in earnings.

“These are the companies that we want to be able to invest in and be able to take advantage of any correction or weakness in market to be able to build up positions”.

Access Asia in one click

The abrdn Sustainable Asian Opportunities Active ETF (Managed Fund) ASX:ASAO, launched on the ASX late last year and invests primarily in a concentrated portfolio of around 35-70 Asian (excluding Japan) listed securities with the potential for capital growth and increased earning potential. Learn more

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