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Why I'm underweight India, overweight China: Lion Global expert

Why I'm underweight India, overweight China: Lion Global expert

China will likely be the stabilising force for the Asian region in the New Year ahead, given that the 19th National Congress of the Communist Party of China will be taking place in autumn this year, Thio Siew Hua, senior director, co-head, Asian equities at Lion Global Investors has said.

Keep that in mind, Hua said it is likely that the Chinese government will ensure there is economic and social stability this year. It is likely that the GDP growth target of 6.5% will be slightly exceeded, because the government would wish to end the term on a good note.

‘I’m inclined to believe that we are at an inflexion point in terms of earnings. The negative earnings revisions in Asia, which we have seen over the past six years are coming to an end,’ Thio told Citywire Asia.

‘We have already seen earning revisions in Thailand and Korea as well, in sectors such as materials, technology hardware and energy. I think this will become a lot more broad-based in 2017.’

Overweight China

In terms of investment opportunities in China, Thio is positive on two areas – resources and financials.

‘Since I joined Lion Global Investors at the start of last July, I always had a more constructive stance on China as growth has stopped decelerating and looked to have stabilised. Therefore, I have an overweight on China.

‘If someone takes the view that the Chinese economy is getting better and not worse, then the person is likely to be positive about commodities, because China drives commodity demand. Given the supply response we have seen in the commodities space over the last few years, supply is essentially contracting and with demand picking up, the market is likely to see a recovery in commodity prices.

‘Therefore, I’m very positive on this space. I played primarily through Australia, while in China, I would focus mostly on the oil sector.’

On financials, Thio said she likes banks. ‘What’s interesting about the Chinese financials sector is that they are cheap while offering very high dividend yields.

‘If someone believes in an incrementally improving Chinese economy, the person is likely to be more positive about the incremental changes in Chinese asset quality. I do see the asset quality improving.

'This is especially true for the private sector, which will benefit the likes of retail-related banks, like the big four and China Merchants Bank.’

Underweight India

In terms of India, Thio believes that Indian reforms, including the recent demonetisation, will benefit the overall economy in the long run; while it will adversely affect the country during the short-term period.

‘I have started reducing positions in India, and I used to be overweight on India. After the demonetisation, I have reduced my position on the country.'

Thio said she is now underweight India.

She said demonetisation is the key to monetary tightening, however, the bottom line is that the economy is about to halt in many areas, which also means that earnings have to be taken down.

Furthermore, Thio said that the upcoming GST implementation in April is going to lead to a significant disruption in the country, as smaller businesses are not ready for this full scale GST reform.

‘There are a lot of small businesses that may not know how to deal with such a change,’ Thio said. ‘There could be quite a bit of disruption as a result of this implementation of a very large-scale GST reform.

‘There are five different rates during the GST reform and the implementation is going to be far more complicated and disruptive than what people would think.

‘So aside from India, which I foresee a significant earnings downgrade, I think the rest of Asia is actually on an earnings upgrade cycle.’

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