In October itself, the global equity market as represented by MSCI AC World Equity index has tumbled by more than -8.7% while most of the Asia equity markets has emerged as the worst performing countries with Korea, Taiwan and China posting double digit losses within a single month period. Meanwhile, the ASEAN equity markets delivered a rather resilient performance of about low to mid-single digit losses over the same period.
|FIGURE 1: Various Market Performance in October
In this month fund choice, we are hand-picking Maybank Greater China ASEAN Equity-I Fund, as we believe it will be worth the risk to invest into the Chinese equity while the ASEAN exposure could provide investors with comfortable cushion against external uncertainties as the ASEAN economy is now less reliant on external demand.
ASEAN Poises To Benefit From On-going US-China Trade War
Although most of the economists would argue that there will be no winner for the US-China trade disputes, some of the recent survey and data showed that the ASEAN countries might poise to reap some benefits from the continuing trade issue between the two world largest economies.
From the short-term perspective, no doubt, that the global supply chain disruption is likely to cause negative impact on the global economy. However, from the mid to long term perspective, should the trade disputes continue to intensify, the ASEAN economies might find some upsides from the escalated Sino-American trade tensions due to the production relocation and trade diversion.
According to a survey done by the American Chamber of Commerce in South China, which surveyed 219 companies, it found out that more than 70% of the US companies that are currently operating in China are considering moving some or all of their manufacturing businesses to other countries and mostly towards Southeast Asia.
In fact, so far this year, the Southeast Asian countries have been seeing a surge in foreign direct investment with Thailand and Philippines’s foreign direct investments surging close to 53% y-o-y and 51% y-o-y respectively, from January to July 2018 (see figure 2). Meanwhile, Vietnam also saw its manufacturing inflows expanding by 18% for the first 9 months of 2018.
Hence, on top of the improving local consumption as a result of higher purchasing power, we believe that the historic opportunities (due to US-China trade disputes) could be another driver for the ASEAN economy.
|FIGURE 2: Philippines and Thailand FDI
Take Advantage On The Current Weakness In China Equities
Most of us would probably have heard about the Warrant Buffet’s famous quote of “be fearful when others are greedy and greedy when others are fearful”. However, we understand that it is always easier said than done.
In order for one to be greedy when others are fearful, we must carry out sufficient study and analysis on the market with a more conservative manner. Let’s use the China equities market as an example. As of 29th October 2018, the Chinese corporate earnings are expected to grow by 15.1% and 15.4% in 2019 and 2020 respectively. Although we believe that the recent earnings downward revision has, to a certain extent, factored in the impact of US-China trade tension, we would like to take a more conservative approach by cutting the earnings growth by another -50%. After factoring the 50% cut in 2019 and 2020 earnings, the Chinese equity will still be trading at undemanding valuation of 9.2 times and 8.0 times of the 2019 and 2020 earnings as compared to its 5-year average of 12.6x PE ratio.
For the worse case scenario, if we assume no earnings growth for the Chinese companies over the next two years due to the tightening financial condition as well as the trade war issue, the Chinese equity market is still expected to deliver more than 20% of annualised returns over the next two years from valuation expansion as well as dividend returns.
Hence, given the limited downside risk in the Chinese equity, we believe now could be a good time for investors to take advantage on the current weakness in China.
|FIGURE 3: Valuation for Chinese Equities
Maybank Greater China ASEAN Equity-I Fund
Maybank Greater China ASEAN Equity-I Fund which was previously known as Maybank Bosera Greater China ASEAN Equity-I Fund is a Shariah-compliant, growth-oriented fund that invests into Shariah-compliant shares within the Greater China and ASEAN market. The recent change of name was reflecting the replacement of Investment Advisor from Bosera International Investment Management Ltd to Value Partners Asset Management Singapore Pte Ltd (VP).
Despite the change of investment advisor, the fund’s objective and investment strategy remain unchanged - to achieve capital growth over the long term by investing between 70% to 98% of the fund’s NAV in shariah-compliant securities.
The benchmark of the fund is MSCI China Islamic Index (35%), MSCI Hong Kong Islamic Index (15%) and MSCI AC ASEAN Islamic Index (50%), meanings that, most of the time, the fund manager are likely to maintain half of the fund allocation into Greater China region, while another half in ASEAN market.
At this juncture, the portfolio is mainly investing into H-share for the Chinese equity exposure while the investment advisor is of the opinion that the valuation of the A-share is getting more and more attractive, hence, they are considering to increase the portfolio allocation into A-share.
Value Partners – Experienced Fund Manager in Chinese Equities
VP is one of the Asia’s largest and longest standing independent asset management firm that founded in year 1993, with the current assets under management standing at USD 16.4b as of end September 2018 and their core businesses are deeply rooted in the Greater China region.
In fact, the founder of Value Partners, Datuk Seri Cheah Cheng Hye, a Malaysian who was born and raised in Penang, has recently set up Value Partners Asset Management Malaysia Sdn Bhd. The Malaysia office will be their South-East Asia hub, serving the VP’s new markets such as Indonesia, Brunei and Vietnam.
In term of performance, the fund that managed by Value Partners portfolio team which has more than 25 years history, delivered rather respectable and consistent returns over the past 5 years. The fund outperformed our recommended fund – CIMB Principal Greater China Equity Fund and the Hang Seng Composite Index in the year of 2013 to 2015 and 2017.
|FIGURE 4: Funds' performance comparison
All in all, we believe the healthy consumption growth as well as the surge in foreign direct investment could be one of the strong drivers for the ASEAN economies moving forward. On top of that, the current cheap valuation with limited downside risk in the Chinese equities should convince investors to take advantage on the current weakness.
As such, for investors who wish to gain exposure into both ASEAN and Chinese equities, they can consider the
Maybank Greater China ASEAN Equity-I Fund.