Asian markets are not fully prepared to deal with the first interest rate hike by the US Federal Reserve, which poses a risk to the outlook for equities.
That’s according to Christine Seng, lead manager on the recently launched Threadneedle Developed Asia Growth and Income fund.
‘While tapering has been factored in, I don’t think investors have fully factored in the timing of the interest rate hike,’ she told Citywire Asia. ‘That is perhaps something the market is not fully prepared for and we are monitoring that carefully.’
She expects a US rate hike to come through somewhere between the middle and end of next year.
The fund, which Seng runs with Soo Nam Ng, focuses primarily on investing in Singapore, Hong Kong, Australia and New Zealand. However, Seng believes the main driver of earnings growth for the region will continue to be China.
She also believes that China’s moderating growth is positive news for the region. ‘We are seeing China stabilising rather than slowing down sharply,’ said Seng.
‘As investors become accustomed to a stabilising China, they will become more comfortable with slower but sustainable growth rates for the region; 3-4% rather than 5-6%. That will likely lead to lower risk aversion and support a broad-based recovery for equities.'
She holds the view that Asia is transitioning from a high growth to a more stable growth environment. In turn, the region’s companies are also adapting by consolidating operations to become more profitable and efficient.
However, this year, slower economic growth across the region has moderated earnings growth to around 10%, Seng said. In addition, she estimates earnings in Australia and Singapore, the markets she focuses on, to grow by 7-8%.
‘In Singapore, we are overweight on banks. In particular, we like DBS, whose valuations seem attractive,’ she said.
Playing technology, but differently
In terms of investment themes, Seng said that since the fund’s launch in April, she has been positive on the e-commerce sector in China. ‘We are playing that by buying into logistics companies,’ she said.
One stock she likes is Global Logistics Properties (GLP), a Singapore-listed company that develops, owns and leases logistics facilities in China and Japan.
‘Companies like GLP are beneficiaries of the e-commerce theme, since 25% of the total leased area in China is accounted for by such players,’ Seng said.
Another stock she likes is Haier Electronics, a household appliance manufacturer listed in Hong Kong.
CNR Corp, a Chinese state-owned locomotive company, is another pick of Seng due to the fact the Chinese government has announced three spending packages for the railways this year. Seng said this has boosted prospects for the sector.
In the period since launch, which covers April 30 2014 to June 30 2014, the Threadneedle Developed Asia Income and Growth fund has returned 7.11%,while the benchmark MSCI AC Asia Pacific ex-Japan TR has climbed 8.76% in US dollar terms.