Companies from heavy industries in China, such as cement, coal and steel, are starting to show early signs of demand recovery after being in negative territory over the past five years.
That’s the view of Caroline Yu Maurer, head of Greater China equities at BNP Paribas Investment Partners, who holds a small portion of heavy industry stocks in her China portfolio.
‘Cement, coal and steel suffered significantly over the last five years as the sector suffered slowing demand and significant overcapacity as a result of heavy capacity expansions,’ Maurer told Citywire Asia.
‘However, given all the changing policies in those industries recently, we are likely to see a turnaround, both in the fundamentals of those companies and the structural changes going forward.
‘Though it remains uncertain whether the recovery is sustainable, if the reforms are materialised, those industries will look better in six months’ time compared to how they look now.’
Besides heavy industries, Maurer is also upbeat about consumer, service-related, IT and internet stocks.
‘We own Tencent, Baidu, and white liquor-related stocks within the consumer sector. Even against the backdrop of economic slowdown, these are the companies that will likely continue to deliver earnings growth.’
A combined approach
Unlike other portfolio managers focusing on a pure bottom-up investment approach, Maurer believes a combined bottom-up and top-down approach will help her pick appropriate stocks.
'We are very much bottom-up driven, but are constantly carrying out validation checks to ensure the portfolio aligns with our macro perspective’ she said.
‘You can pick the right stock, but the weighting and sector allocation need to be supported by the macro view at that point of the economic cycle.
‘The macro view is not about what the Chinese GDP figure is this year. It is more about where we are in terms of the economic cycle, whether the government has intentions to further loosen monetary policy and whether inflation or corporate leverage are heading in the right direction.'