By Robert Lloyd George manager of Quaero Capital’s Bamboo Strategy
China’s economic outlook and market continues to go from strength to strength and the country now accounts for over 30% of Quaero Capital’s Bamboo strategy.
Using both top down asset allocation and bottom up analysis, the strategy aims to generate consistent returns by investing in a portfolio of 30 to 50 stocks of Asian and emerging market companies that will benefit from the emergence and growth of domestic consumption.
Stock selection focuses on strong cash flow generation and sustainable dividend yield. In China, recent attention has been on the tourism and education sectors through stocks such as China Lodging and TAL Education, at nearly 6% weighting, as well as internet and e-commerce plays like Alibaba, Tencent and Netease.
While China’s economy is robust, its debt levels remain a concern. President Xi Jinping has decreed that stability is the watchword until October, so volatility would normally remain subdued. But the enduring property bubble is a difficult challenge for the Beijing leadership.
The insurance sector in China has also had a setback since the former Chairman of the industry regulatory body was questioned by authorities. Nevertheless, Hong Kong’s insurance group AIA continues to do exceptionally well.
The strategy’s other major weighting is India, at 22%, where there is steady progress in earnings and economic activity. Holdings range from banks (Yes Bank, HDFC and ICICI) to healthcare (Cadila), autos (Force Motors), to broadcasting (Zee Entertainment), and on-line travel (MakeMyTrip). The Rupee has strengthened by 5% against the US dollar this year, and this is a very positive tailwind.
In Japan Sony has had an impressive recovery in profits. After the elections in South Korea we expect the government to take a softer line on North Korea. Paradoxically, this may be a relief to the South Korean economy, especially to those companies depending on Chinese tourists, such as AmorePacific.
The outlook for Asia remains cautious. The expectation is that from the third quarter starting in July, there will finally be a correction in this very long bull market, which has lasted for nine years in the United States.