Top Stock Pickers Seek Gains in China Energy, Japan Real Estate

(Bloomberg) — Asia’s top-performing fund managers are seeking opportunities in battered Chinese stocks and turning selective on the hot artificial intelligence theme as the region comes off a tough year.

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The MSCI Asia Pacific Index hugely underperformed global peers in 2023, with its 9% rise less than half the S&P 500’s advance. The global backdrop now looks more favorable. The Federal Reserve’s much-anticipated interest rate cuts are poised to add tailwinds while expectations are growing for Chinese equities to bottom out.

Still, Beijing’s policy uncertainty and a potential rise in volatility around elections in India and Taiwan make for a tricky investment landscape. The MSCI’s regional benchmark slid about 2% in the first week of 2024.

Looking ahead, here are some investment ideas by market-beating money managers focused on Asian equities.

Seek China Value

Bao Wuke, one of China’s best-performing fund managers, is positive on the country’s energy firms and medical equipment makers.

His Invesco Great Wall Value Boundary Flexible Allocation Mixed Fund returned 16% in 2023 to beat more than 95% of its peers, according to data compiled by Bloomberg. Bao’s performance stands out in a year when the CSI 300 benchmark fell 11% to post a third annual decline.

The nation’s energy sector has “high business barriers and more reasonable valuations,” while the medical device market presents “huge room for growth,” said Bao, a fund manager at Shenzhen-based Invesco Great Wall Fund Management.

“In the early stages of transition from conventional energy to renewable energy, there will be an underinvestment in conventional energy which means new supply in this area will be limited,” he added.

His top energy holdings included CNOOC Ltd. and Zijin Mining Group Co. as of end-September, according to its factsheet. Both rallied more than 20% in 2023. Bao said he took profit on media stocks in the second quarter following the AI frenzy.

READ: Forsaken China Stocks Get a New Look by Top Emerging Market Fund

Selective AI Bets

After a year of blazing gains for everything AI, the Allianz Global Investors Taiwan Technology Fund is turning more selective on chip-related stocks.

The fund returned 72% last year to outperform 95% of peers, according to Bloomberg-compiled data. Its latest factsheet shows top holdings included eMemory Technology Inc. — up more than 80% in 2023 — and Taiwan Semiconductor Manufacturing Co.

With new competitors joining the AI race, suppliers with higher entry barriers such as chip design service providers and component makers for heat spreading technologies and high-speed printed circuit boards should outperform, said manager Benson Pan.

“Suppliers for custom chips have strong visibility to win orders from hyperscalers or EV companies through 2025,” Pan said, referring to US Big Tech’s demand for such products.

Pan is turning more cautious on assembly firms and equipment manufacturers. Overall, “AI will be the long-term trend but the share price rise has been crazy last year,” he said.

Japan Property, Chemicals

Managers of the Arcus Japan Fund, which delivered a 40% gain to beat 98% of peers, are holding on to an overweight stance for real estate and chemical stocks as valuations don’t fully reflect their potentials.

The sub-gauges of chemicals and real estate stocks each rose more than 20% last year, marginally underperforming the Topix Index’s 25% rally.

Fundamentals for the real estate sector are “quite sound” with vacancy rates, demand, and funding environment all supportive, said investment managers Mark Pearson and Ben Williams. “Many Japanese companies are leading players in specialty chemicals used in a variety of high technology industries such as semiconductors, medical and electric vehicles.”

The fund’s November factsheet showed their top real estate holdings included Mitsubishi Estate Co. and Sumitomo Realty & Development Co., both of which saw double-digit gains last year.

India Industrials

India’s stock market value surpassed $4 trillion in December as investors kept plowing money, lured by solid earnings and its growing standing as an alternative to China in the global supply chain. China’s poor performance added to its appeal.

“We continue to be positive on the entire gamut of capital goods segment,” said Samir Rachh, whose Nippon India Small Cap Fund returned 50% last year, beating 88% of comparable funds in data compiled by Bloomberg.

READ: Modi’s Nation-Building Push Spurs $125 Billion Industrials Rally

“We feel the capex cycle in India is just about to turn for long and also this sector can benefit big from China plus one where in global companies will start buying more from Indian companies.”

Top holdings include Bharat Heavy Electricals Ltd. and Apar Industries Ltd. Their shares more than doubled last year.

Asian Minnows

Ruchir Desai, a fund manager at Asia Frontier Capital, expects the rally in Asia’s frontier markets to extend into 2024 thanks to growing macro stability, with larger economies like Vietnam playing catch up.

The equity benchmarks of Pakistan and Laos — a rare investment destination for many due to the markets’ small size and volatility — ranked among the world’s top five gauges in 2023, notching gains of more than 50%. Vietnam rose 12%.

READ: Risky Stock Minnows Are Beating Everybody in Asia: Taking Stock

“My biggest bet for 2024 is the economic recovery story playing out in Bangladesh, Pakistan, and Sri Lanka as these markets will benefit from greater political stability, macro-economic stabilization, easing monetary policies and a robust recovery in earnings,” said Desai.

His AFC Asia Frontier Fund returned 23% in the 12 months through November to beat 98% of peers in data compiled by Bloomberg.

–With assistance from Chiranjivi Chakraborty.

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