Discovering Asia’s Cheap Growth Stocks

The cyclical rally is offering opportunities in previously expensive areas of Asian equity markets and for managers to uncover growth stocks ‘disguised’ as value

The cyclical rally is throwing up opportunities in previously expensive areas with managers able to uncover potential growth stocks disguised as value.

The Covid-19 pandemic has shaken-up the investment universe by kickstarting a long-awaited rotation from growth into value and defensive into cyclical areas of the market.  The outbreak of the virus also accelerated a number of secular trends including the digitisation of the economy and a shift towards more environmentally sustainable living and working practises.

Citywire AAA-rated1 Anh Lu, Portfolio Manager on the T. Rowe Price Asia ex-Japan Equity strategy, said Asian emerging markets offer investors a great opportunity to play these rotations and societal shifts: ‘Among global emerging markets, Asia has one of the most dynamic and diverse opportunity sets where skilled investors can generate alpha irrespective of any dominant style factor.

While companies that are able to grow earnings and cashflow over time are one of her top priorities, she is also taking advantage of potential new growth stocks that have historically been viewed as value stocks. ‘Due to Covid, we have consumer companies or travel-related stocks which have still got a lot of secular growth but they’re trading like value stocks,’ Anh explained.

She’s also keeping a close eye on hardware, software and services companies that can help support the increasing investment in infrastructure upgrades in areas such as energy and the development of so-called ‘smart’ cities. She holds semiconductor giant TSMC, for example, which is seeing more and more demand from the industrial sector, and Inofsys, which is a leading service provider to many global businesses. While she acknowledges that it may take a bit of time for companies to prove their business models, she also points out the area is very durable.

Haider Ali, Associate Portfolio Manager of the Emerging Markets Discovery Equity strategy, which seeks to identify forgotten stocks with fundamental re-rating potential, said his stock-picking was less driven by a rotation from growth-to-value and more by how governments dealt with the Covid-19 crisis.

‘Within global emerging markets, Asia offers one of the t the most dynamic, diverse and deep opportunity sets available.’


Anh Lu, Portfolio Manager, T. Rowe Price Asia ex-Japan Equity strategy

In his opinion, the key difference in Asia and emerging markets versus the developed world was that there was no large fiscal stimulus or spending plan from the developing nations. Central banks in Asia used a decisively different toolkit than their counterparts in more developed nations.

In China, for instance, the government did not restimulate the economy post-Covid-19 as much as it did after the financial crisis. Thus, the increase in infrastructure spending was focused on already sanctioned projects that fuelled demand for materials, construction and equipment.

According to Haider, China is gradually going back to the credit tightening measures it had applied before the pandemic. This time, however, the government is targeting specific sectors by redirecting capital from traditional, capital-intensive industries like steel, aluminium and mining toward green businesses.

‘To drive the green economy, we need to invest in renewables, grids and clean companies. That alone presents a range of opportunities for investors. Additionally, China has ambitious decarbonisation goals that will support the green transition’ he said.

Decarbonising an entire economy requires more than investing in renewable energy and electric vehicles, we will see an increasing demand for traditional sectors too. For Haider, it’s about changing the infrastructure from the ground up. This will take time and money, but we sense the desire is there from both companies and policymakers.

Wenli Zheng, Portfolio Manager of T. Rowe Price China Evolution Equity strategy, pointed out that there are mispriced opportunities, especially in the small and mid-cap space. He seeks to invest beyond the 100 largest names and concentrates on the rest of the universe, where investors can potentially find hidden gems.

In Wenli’s opinion, mispricing often results from the short time horizon China’s domestic investors use as they chase the top-performing funds. Wenli’s team, however, is not constrained by style or sector and can own early-stage biotech companies as well as large shipping businesses – as long as fundamentals and mispricing co-exist.

Despite a fresh outbreak of new Covid cases, the pandemic has also created opportunities in India, where value stocks have become historically cheaper.

While Anh acknowledges that investors will probably have to endure tough results in the next couple of quarters, she also believes that things will get better and sees India as a great portfolio diversifier that presents bottom-up opportunities across various sectors.

‘We’re not just talking about airlines and hospitality, but also consumer companies, IT services companies and banks with great franchises that have been ignored by investors,’ Haider said.

That is changing. Investors are now starting to recognise that Asia offers a rich hunting ground for active investors willing to do fundamental research to find the best opportunities.

India is waiting in the wings

India has been beset by a new wave of the Covid-19 pandemic, but the region offers a diversifier to dominant China in the Asia region.

A new highly contagious delta variant of the coronavirus has been raging through India, creating a huge surge in cases, but managers are still optimistic about prospects for the Asia region, which is typically dominated by China.

According to Anh, India is completely uncorrelated to China, unlike other Asian economies that import or export to the world’s second largest economy: ‘I think it acts as a really good diversifier. When we think we are not finding as many opportunities or the credit cycle in China is slightly more negative, we can shift to opportunities in India.’

Anh believes India will benefit from a number of positive catalysts in the long term, including favourable demographics and well-managed companies: ‘It’s a wonderful place to hunt for bottom-up ideas.’

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1Source & Copyright: Citywire as at June 2021. The Fund manager is rated by Citywire based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology please visit www. aboutcitywire.com.

The specific securities identified and described are for informational purposes only and do not represent recommendations.

China Evolution Equity

Risks – The following risks are materially relevant to the portfolio (refer to prospectus for further details): Country risk (China) – all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licence or the Stock Connect program may be subject to additional risks. Currency risk – changes in currency exchange rates could reduce investment gains or increase investment losses. Emerging markets risk – emerging markets are less established than developed markets and therefore involve higher risks. Small and mid-cap risk – stocks of small and mid-size companies can be more volatile than stocks of larger companies. Stock connect risk – the fund may invest in certain Shanghai-listed and Shenzhen-listed securities (“Stock Connect Securities”) through the Shanghai-Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect respectively (“Stock Connect”). This mechanism carries higher risk.

Emerging Markets Discovery

Risks – The following risks are materially relevant to the portfolio (refer to prospectus for further details): Country risk (China) – all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licence or the Stock Connect program may be subject to additional risks. Country risk (Russia and Ukraine) – in these countries, risks associated with custody, counterparties and market volatility are higher than in developed countries. Country risk (Saudi Arabia) – in Saudi Arabia it is necessary to use a trading account to buy and sell securities, introducing additional third-party associated risks. Emerging markets risk – emerging markets are less established than developed markets and therefore involve higher risks. Small and mid-cap risk – stocks of small and mid-size companies can be more volatile than stocks of larger companies. Stock connect risk – the fund may invest in certain Shanghai-listed and Shenzhen-listed securities (“Stock Connect Securities”) through the Shanghai Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect respectively (“Stock Connect”). This mechanism carries higher risk. Style risk – different investment styles typically go in and out of favour depending on market conditions and investor sentiment.

Asia Ex Japan

Risks – The following risks are materially relevant to the portfolio (refer to prospectus for further details): Country risk (China) – all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licence or the Stock Connect program may be subject to additional risks. Currency risk – changes in currency exchange rates could reduce investment gains or increase investment losses. Emerging markets risk – emerging markets are less established than developed markets and therefore involve higher risks. Small and mid-cap risk – stocks of small and mid-size companies can be more volatile than stocks of larger companies. Stock connect risk – the fund may invest in certain Shanghai-listed and Shenzhen-listed securities (“Stock Connect Securities”) through the Shanghai Hong Kong Stock Connect or the Shenzhen-Hong Kong Stock Connect respectively (“Stock Connect”). This mechanism carries higher risk. Style risk – different investment styles typically go in and out of favour depending on market conditions and investor sentiment.

General portfolio risks, to be read in conjunction with the portfolio specific risks above. Capital risk – the value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different. Equity risk – in general, equities involve higher risks than bonds or money market instruments. ESG and Sustainability risk – may result in a material negative impact on the value of an investment and performance of the portfolio. Geographic concentration risk – to the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area. Hedging risk – a portfolio’s attempts to reduce or eliminate certain risks through hedging may not work as intended. Investment fund risk – investing in funds involves certain risks an investor would not face if investing in markets directly. Management risk – the investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably). Operational risk – operational failures could lead to disruptions of fund operations or financial losses.

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