To outperform market, JPMorgan China fund picks tech hardware, EV suppliers and health care stocks in correction

China’s stock market correction has given JPMorgan Asset Management a chance to buy their favourites on the cheap. To beat the market, its money managers are going for technology hardware, pharmaceutical leaders and electric-vehicle (EV) suppliers.

The firm’s US$7.9 billion A-Share Opportunities Fund returned 71.1 per cent in 2020 to beat the 27 per cent advance in the broader CSI 300 Index, and ranked among the bank’s top performers in the Asia-Pacific region. This year, however, it has struggled with a 1.3 per cent gain as the rally faded and prices locked in rangebound trading patterns over the past three months.

The fund’s current “high conviction” bets are driven by bottom-up analysis, which favours cyclical growth areas such as technology hardware, pharmaceutical outsourcing and EV supply chain, co-manager Rebecca Jiang said in an interview.

“We look to periods of weakness as good buying opportunities in favoured stocks,” said Hong Kong-based Jiang. “When valuations of growth and value stocks converge, the better long-term opportunity will be found in structural growth stocks, which offer the chance of compounding returns.”

Beating the market through pandemic

Share Opportunities Fund buys on correction

The fund had 21.1 per cent of its money in information technology sector, 18.1 per cent in consumer staples, 17.3 per cent in financials and 13.4 per cent in health care among its largest allocations at the end of April 30. Its top 10 portfolio holdings include Ping An Insurance, Wuliangye Yibin, BOE Technology and Contemporary Amperex.

After a bright start to the year, Chinese stocks have lost their mojo and regressed into rangebound trading patterns for most of the past three months. Jiang attributed that inertia to fading euphoria from China first-quarter economic rebound and efforts to normalise accommodative monetary policies.

Rebecca Jiang, fund manager at JPMorgan Asset Management in Hong Kong.

While recent yuan appreciation has drawn foreign investors back into onshore stocks, efforts to curb its rally will have negative consequences for the market, according to BCA Research. The recent fund inflows, however, are unsustainable on a cyclical basis.

“While policy tightening has brought multiples closer to earth than last year, the upside in Chinese stock prices will be capped by subsiding stimulus and slower profit growth ahead,” strategist Jing Sima said in a June 9 report. “As such, a decisive breakout to the upside in Chinese stock prices will require major reflationary catalysts, and it is the reason we are still risk averse on Chinese equities.”

Yuan – US dollar exchange rate

Price trends over time for how the Chinese currency trades against the US dollar

Yuan - US dollar exchange rate
Yuan – US dollar exchange rate

*An upward slope indicates a depreciation in the value of the yuan, while a downward slope indicates yuan appreciation

Even so, the A-Share Opportunities Fund has taken a long view of the economic outlook and increased its holdings in some of the prominent bets in the market, according to fund reports. It raised its net-asset weights in EV battery producer Contemporary Amperex, Ping An Insurance and Jiangsu Hengrui Medicine, for example, over the past four months, according to the reports.

“The hardware sector is in a sweet spot at the moment,” Jiang said in the interview. “From a cyclical perspective, hardware is well supported by the global economic recovery as the sector is more sensitive to the macroeconomic cycle than software,” she added. “From a structural perspective, it is a beneficiary of the US-China decoupling as China focuses on developing import substitution.”

Another structural change is the increased demand for health care services and products, Jiang added, including health care infrastructure, preventive treatment and vaccine development. Pharmaceutical research and development, R&D outsourcing, and medical-equipment manufacturing are “attractive.”
Even in high-profile industries like EV manufacturing in which China is the biggest market globally, Jiang said it’s possible to ride the trend by taking a deeper dive, while steering clear of expensive carmakers that attract government scrutiny and other industry risks.

“When it comes to electric vehicles, we prefer to get under the bonnet,” Jiang said. “We do this by looking up and down the EV supply chain for areas with the most attractive pricing power.”

She prefers battery companies which supply to many different carmakers, including companies which compete with one another. That way “it doesn’t matter to our portfolios which EV brand does best at any point in time. The supplier will benefit either way.”

Author: Iris Ouyang, David Yong, South China Morning Post

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