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The case for staying invested in Greater China equities

The case for staying invested in Greater China equities

Despite market movements in Greater China, the fundamentals underpinning the equity scene is sound, says Citywire A-rated Kai Kong Chay from Manulife Asset Management.

‘From an economic perspective, Chinese growth remains robust, inflation is muted, and China runs a trade surplus.

‘From a market perspective, earnings continue to enjoy upward revisions, while valuations remain comparatively attractive compared to developed equity markets,’ said the senior portfolio manager of Greater China.

China's economic growth, for instance, continues to be strong with solid gross-domestic-product growth, $3.1 trillion of foreign reserves and a trade surplus. There is no evidence of economic deterioration in fundamentals.

Furthermore, Chinese and Hong Kong equities are supported by the strong inflows of mainland money, and are beneficiaries of increased equity allocation from wealth management and overseas institutions.

In the case of corporates, Manulife continues to see upward earnings revisions with the latest 2018 earnings per share (EPS) growth estimate for MSCI China at 21.6%. The EPS growth estimate was 15.3% at the end of 2017.

‘Valuations remain compelling at around 14x to earnings, a more reasonable level when compared to developed equity markets, for example, US is around 19x to earnings,’ Chay said.

More importantly, the continued southbound flow to China and Hong Kong equities year-to-date has continued to drive liquidity.

‘We believe that when the dust settles and sentiment improves, investors will refocus on the strong economic and corporate fundamentals that China has,’ he added.

The executive is selectively adding more to the structural growth yet under-owned sectors that are trading at reasonable valuations, such as selected consumer related names.

He also holds on to other long-term themes such as research and development, consumption upgrade, and policies related companies that can benefit over the long run.

Manulife's Greater China equities fund has invested in well-known tech firms, including Tencent Holdings, Alibaba Group Holdings and Taiwan Semiconductor, which are among Chay's top five holdings.

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