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“When China sneezes, the rest of Asia catches a cold.” That’s an old saying, but it’s taken on new relevance as Asia’s symptoms have recently worsened. Concerns over the US-China trade war and weaker currencies have taken their toll on the region.
- The MSCI China Index was down 6% for the second quarter, including an 8% decline in June. The index ended the quarter down 15% from its January peak, and has officially entered a bear market.1
- The MSCI Asia ex Japan Index ended the second quarter down 13% from its peak in January, and down 4.4% from the start of the quarter.1 All countries were down, with the exception of Australia and New Zealand, including double-digit losses for Indonesia, Malaysia, Thailand and the Philippines.2
Looking at the performance data for the second quarter, one thing seems to stand out. Despite the volatility and down draft in the markets, investors continued to reward the highest growth and highest quality businesses with little regard for valuation.3 In fact, Asian stocks with high price-to-earnings (P/E) ratios outperformed those with low P/E ratios by 480 basis points during the quarter.4
Earnings expectations take a turn
At the start of the year, synchronized global growth was a clear trend, and it looked to be sustainable. As a result, more Asian companies were experiencing positive earnings revisions than negative revisions. More recently, however, the synchronized recovery narrative has come into doubt, and more companies are experiencing negative earnings revisions than positive. The current ratio is below the long-term average, and the lowest in two years.5
Where are we seeing opportunities?
Invesco Asia Pacific Growth Fund’s bottom-up approach seeks companies with attractive Earnings, Quality and Valuation (EQV) characteristics, and we have taken advantage of the weakness in China with two initiations during the quarter. In 2018, we have had five new initiations — all in China — four of which are consumer-related.
- China Mengniu Dairy Co. Ltd. (0.72% of Invesco Asia Pacific Growth Fund as of June 30, 2018): The company, a leading provider of dairy products in China, is benefitting from changing Chinese consumer habits.
- Sunny Optical Technology Group Co. Ltd. (0.97% of Invesco Asia Pacific Growth Fund as of June 30, 2018) Sunny has transitioned from a module assembler to a more diversified, stronger company offering higher-margin handset and vehicle lenses.
- Yum China Holdings Inc. (0.78% of Invesco Asia Pacific Growth Fund as of June 30, 2018): With strong brands including KFC and Pizza Hut, we believe this fast-food restaurant company should benefit from consumer wealth creation in China, given the country’s relative lack of restaurants.
- Wuliangye Yibin Co. Ltd. (1.94% of Invesco Asia Pacific Growth Fund as of June 30, 2018): A direct beneficiary of wealth creation in China, this alcoholic beverage company places second in national preference.
Explore where the Invesco International and Global Growth team sees opportunities around the world.
1 Sources: MSCI, JP Morgan, as of July 1, 2018
2 Source: Merrill Lynch, as of July 2, 2018
3 Source: Merrill Lynch, as of June 25, 2018
4 Source: UBS, as of July 2, 2018
5 Source: Merrill Lynch, as of June 27, 2018
Blog header image: SnvvSnvvSnvv/Shutterstock.com
The MSCI China Index is an unmanaged index considered representative of Chinese stocks.
The MSCI All Country Asia Pacific ex-Japan Index is an unmanaged index considered representative of Pacific region stocks, excluding Japan.
Price-to-earnings ratio measures a stock’s valuation by dividing its share price by its earnings per share.
Holdings are subject to change and are not buy/sell recommendations.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
The fund is subject to certain other risks. Please see the prospectus for more information regarding the risks associated with an investment in the fund.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
Brent Bates, CFA, CPA
Senior Portfolio Manager
Brent Bates is a Senior Portfolio Manager with the Invesco International and Global Growth team, focusing on large- and mid-cap equities in Asia Pacific and Latin America. Mr. Bates is a co-manager of the Invesco International Growth, Invesco Asia Pacific Growth and Invesco Developing Markets strategies.
Mr. Bates entered the investment management industry in 1996 as a mutual fund accountant with Invesco. Between 2002 and 2005, he served as an equities analyst with Invesco’s US Multi Cap Growth team, which he joined after serving as an analyst on the firm’s Quantitative Analysis team from 1998 to 2002. He joined the International and Global Growth team as an equities analyst in 2005, and was promoted to senior equities analyst in 2007 and portfolio manager in 2011. He assumed his current role in 2015.
Mr. Bates earned a BBA degree from Texas A&M University. He is a Certified Public Accountant (CPA) and a Chartered Financial Analyst® (CFA) charterholder.