Manulife Asset Management particularly likes the energy sector in China on the back of expected tighter supply and firmer oil prices, and continues to seek companies that will benefit from supply-side reform.
That's the view of Kai Kong Chay, senior portfolio manager, Greater China equities at Manulife AM.
Chay said the producer price index (PPI), which measures the change in the price of
goods sold by upstream producers, has maintained its positive upward trend since last September.
Three sectors benefitting from this increased pricing power, cash flow and earnings are materials, industrials and energy, he said.
'Looking ahead, if PPI growth continues, the price rise may widen to include mid-stream producers and finally, the core end of the consumption curves, including consumer staples, food, garment and textiles,' said Chay.
'Depending on how certain other factors play out, we could see new major investment opportunities present themselves.'
On the risk front, Chay is still waiting to see if the price effect filters through to the core inflation level.
'Along with the PPI recovery ride, we have seen the price effect channeled from upstream through to midstream producers such as fertilizers, chemicals, and internationally-oriented sectors including ports and containers.
'However, the rally has yet to translate to the core end of the consumption curve. If investors are too cautious on certain segments, such as consumer discretionary, they
could miss out on opportunities.'
Chay said that heightened trade protectionist policies from the US, for example a border adjustment tax, if implemented, could negatively affect international inflows into the Asia block.
On the radar
Two major summits Chay said he will keep his eye on in China this year include the Belt and Road summit and the 9th Brics summit.
'Investors might gain insights into what role China wants to play in the new era in trade relations – especially with the US having pulled out of the Trans-Pacific Partnership.
'China's insurers have been able to buy and sell Hong Kong shares through the existing stock connect since September 2016.
'We view this fund flow as being supportive of Hong Kong equities and expect southbound turnover to potentially increase from below 10%, to 15%, to 20% in the next two-to-three years.'