HONG KONG: J.P. Morgan Asset Management believes that very attractive opportunities exist in the Greater China markets in 2012.
Jan 04, 2012
Hong Kong, 4 January 2012: J.P. Morgan Asset Management (JPMAM) believes that very attractive opportunities exist in the Greater China markets in 2012. This is particularly true for China, which is trading below Global Financial Crisis lows in valuation terms and where earnings revisions have been surprisingly stable despite negative news from around the world. With the recent loosening of liquidity in China, JPMAM believes there is an opportunity to recapture gains in stocks and performance lost during the crisis-like atmosphere in 2011.
Speaking at a press conference today on the market outlook for the Greater China region in 2012, Howard Wang, Head of the Greater China team at JPMAM noted, "Global worries about Europe paired with China economic slowdown concerns created volatile markets last year where growth was de-rated. We expect markets to remain volatile though the risks of a hard landing in China should ease, supported by more flexible policies given less inflation pressure. We believe the CPI reading will continue to soften in the next few months, while growth could return as China’s policy priority is to ensure social stability as well as a smooth leadership transition."
"While there has been a fair amount of concern over the Chinese banking system, we see several reasons to be more optimistic. First, the non-performing loan (NPL) balance has been falling. Also, the loan loss reserve (LLR) coverage is ample. We think Chinese banks will weather this uncertain period given their improving NPLs and sufficient capital."
"Over the first three quarters of 2011 Chinese banks already have realised 80% of their full-year earnings estimate. There is a meaningful prospect for EPS upgrades, especially as analysts have become more negative for 2012. Taking into account the prevailing domestic and external environment, our prognosis is for a gradual normalization in the share price of Chinese banks. Their valuations have fallen below 2008 financial crisis levels (5-6x PE), which we think are too depressed."
"Elsewhere, we maintain our overweight in consumer companies, which have been defying a slowing environment by delivering persistent strength in both same store sales and free cash flow yield. We also see scope for margin normalization as inflation begins to fall."
Commenting on Hong Kong, Howard pointed out that both absolute and relative valuations have reached very attractive levels, especially for China- related stocks. He is selectively adding to stocks geared towards China growth and capable of sustaining superior earnings performance.
"We take a more cautious approach to Hong Kong, where interest rates have troughed and investor sentiment towards properties and banks is likely to be capped. Macau gaming stocks, while still having solid fundamentals, such as strong cash flows and favourable government policy, may have reached a plateau as much of the positives are already priced in."
"That said, Hong Kong retailers remain blessed with China consumption. We are bullish on this secular growth theme and continue to see quality consumer names from a bottom-up perspective.
As for Taiwan, the market is throwing out fundamentally sound and attractively valued stocks, which presents interesting opportunities for long-term investors. With still positive domestic consumption and semiconductor inventories turning more healthy, our area of focus is on these segments.
"Taiwan’s exports will inevitably be impacted by the weakness in external demand in particular the economic slowdown in Europe. Expectations on smartphone-related supply chain companies have come down and a couple of earnings downgrades are a distinct probability. The presidential election in 2012 comes at a delicate time as Taiwan’s politicians need to maintain property curbs to solicit votes. Domestically, we still own retail and hotel stocks for the China economic theme as the domestic environment continues to improve and the number of tourists from China increases. Longer term, we expect further normalization of business policies in Taiwan as the economy has trailed behind most of Asia in recent years."
All in all, valuations in the Greater China markets are very attractive at the current level. JPMAM has added to positions in China, particularly in consumption and banks, while paring back property and financial holdings in Hong Kong and Taiwan. Our principal overweights are Chinese banks, Chinese consumption, Macau gaming, and Taiwanese petrochemicals and semiconductors.
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Issued by JPMorgan Funds (Asia) Limited
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Notes to Editors
J.P. Morgan Asset Management ("JPMAM") is the brand name of J.P. Morgan Chase & Co’s asset management companies.
J.P. Morgan Asset Management is a global asset management leader providing world-class investment solutions to clients. With over US$1.3 trillion in assets under management (the Asset Management client funds of J.P. Morgan Chase & Co. as at 30 September 2010) and offices in 41 locations around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.
Commitment to Hong Kong
JPMAM’s investment management business in Asia has remained headquartered in Hong Kong for more than three decades and today has about 500 employees based in this location. JPMAM and its investment arm - JF Asset Management - are one of the largest local investment managers in Hong Kong with over US$90 billion (30 September 2010) of funds managed across the Asia Pacific region.
As part of a major global investment group, we are committed to providing specialist teams with the resources needed to deliver successful products and performance to our clients. The Hong Kong-based Pacific Regional Group, together with the local presence of the Global Portfolios Group, forms the core of JPMAM’s investment management operations. In addition to the knowledge and experience of our individual investment professionals, the stability of the team has enabled JPMAM to develop strong relationships with local clients.