The last 12 months have been a tough period for Asian markets. Turmoil in the Chinese property sector, global rate hikes, strong inflation, the Russia-Ukraine conflict, higher commodity prices, China’s zero-Covid policy, and further global supply chain concerns have all weighed on sentiment.
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Markets have fallen, with China A-shares suffering the most with strongly negative sentiment following Covid lockdowns of major cities. Amid this backdrop, stocks with long duration growth expectations have generally struggled versus companies with more defensive revenue streams, while commodity-consuming companies have underperformed commodity producers. While China has struggled, the Indian market has held up despite having many long duration growth companies at expensive valuations, being a commodity consumer and facing higher inflation.
Looking ahead, the issues potentially facing investors remain largely similar. Downward earnings revisions for the market will likely increase, thereby questioning the price investors are prepared to pay for this income stream. However, there are some stock opportunities with a select number of areas of the market having faced significant selling pressure to the point where risk/reward looks attractive.
Despite the macro issues facing China, some mainland listed A-shares are looking interesting. The market is currently very short-term focused, so we can expect more volatility. However, we think the most likely outcome may be that each mutation of Covid exhibits less virulence, to the point of allowing China to exit its zero-Covid policy. This could possibly be later this year or next calendar year. Any such easing of mobility restrictions may result in a material stock market rebound.
For instance, a company like Focus Media is in a sector that is not directly impacted by regulation. It is a leading display advertising company in China, with screens in offices and shopping malls, operating in a duopoly market structure. Its stock price valuation is now looking very attractive versus its long-term listed history, and it has net cash on the balance sheet, which will help see it through a tough macro environment. It still has scope for growth via expansion into lower tier cities.
Building materials companies are another area of interest. Amid unpaid invoices by beleaguered developers and rising commodity costs, the industry is facing consolidation as smaller players exit. Companies with strong balance sheets that can withstand the pain are currently gaining market share, potentially giving them greater future pricing power and growth if the cycle turns. SKSHU Paint and waterproofing materials group Beijing Oriental Yuhong are two such companies.
Outside of China, Asian technology firms with a leading global position also offer opportunity. Although demand is likely to fall for technology products, areas like foundries are still undersupplied, which offers a degree of pricing power.
