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China and India drag down JPM Asia
JPM’s Edward Pulling is looking to get back on track after his exposure to China and India saw him underperform the benchmark over three and five years.
Edward Pulling’s JPM Asia fund has endured a difficult two years, with both of its biggest country bets – India and China – and its decision to back industrials over utilities and telecoms severely affecting performance.
The fund, which features in our Citywire Selection recommendations, maintains a strong bias towards China through a 26% direct investment and a further 18% in Hong Kong, the bulk of which is in China-focused enterprises.
Sceptical about a Chinese 'hard landing'
Lead client portfolio manager Pinakin Patel fervently believes that China will avoid a 'hard landing', and has maintained a different view from much of the market for some time. In the past he was sanguine about ongoing concerns over a property bubble and high levels of non-performing bank loans, both of which have failed to happen so far.
Despite the recent spate of poor data coming out of China, Patel believes the Chinese economy can manage its way out of the slowdown, and is looking for a sign that policymakers are trying to revive the economy.
Although he concedes that the headline numbers don’t look great, he is hearing anecdotal evidence that the slowdown has been overdone, and thinks the recent rate cut might signal the start of that revival.
Much of his positivity stems from the strong corporate fundamentals, which he thinks have been largely ignored by investors, along with bourgeoning consumer demand in China. He highlights the impressive performance of China Sands, the Hong Kong-listed Macau gaming company, as a way to access this theme.
The fund is also heavily invested in banks and property companies, along with the cement firms and engineers that would benefit from an upturn in domestic growth.
Less keen on India
This same domestically driven consumer demand story is what drew him to India, but he has since retraced his steps and significantly reduced the weighting. At the end of November last year the fund’s allocation to India stood at 16.2%, while by the end of April it had more than halved, and now stands at an index underweight of 8%.
His concerns stem from the Indian political environment and its ramifications for foreign domestic investment. Clearly, political risk is part of any investment in Asia, but the ongoing Vodafone (VOD.L) court case is leading to severe underinvestment from foreign companies, with the country receiving just a quarter of the foreign direct investment that Indonesia enjoys.
In addition to China, the fund maintains a positive view on Indonesia and Thailand. Although the position in Indonesia was trimmed at the beginning of the year on the grounds that it looked fully priced after such a good run, the country is still a fund overweight.
Thailand: attractive valuations
The fund has 6.4% invested in Thailand, where he believes the stock market looks cheap relative to other countries in the region. Key holdings include poultry producer CP Foods and domestic banks Kasikorn and Krung Thai.
There is no question that this fund has underperformed, with its big calls repeatedly hampering performance in recent years. Pulling’s insistence on backing economies and sectors that are susceptible to a downturn in Western and Chinese growth has seen the fund fall below the benchmark over the past five years, returning 21% compared with a 33% return on the FTSE Asia Pacific ex Japan index.
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