Inflection point for Asian stocks after sell-off? The "bottom-up" layout of foreign capital in China

　　This year, global investors have encountered a "Bear Hug" - in the tragic US "battlefield", the return of the classic 60/40 stock bond portfolio in 2022 is -34.4%, the worst in 100 years. 2019; even a defensive 25% cash/commodities/stocks/bond portfolio yielded only -11.9%, the worst performance since 2008.

　　As of the end of October this year, the Federal Reserve’s frantic interest rate hikes have led to capital outflows from emerging markets. Emerging market stocks excluding China fell 24%, and the MSCI China index fell 42%.

From October to the present (the market closes on November 1), the outflow of northbound funds has exceeded 50 billion yuan, and the accumulated net purchases this year have exceeded 1 billion yuan. Last year, the cumulative net inflow was as high as 400 billion yuan, setting a new high since the opening of Shanghai-Shenzhen-Hong Kong Stock Connect. .

On November 1, the Asia-Pacific markets rebounded collectively, with the Hang Seng Index closing up 5.23%.

　　How do international investors view the future trend of the Asia-Pacific market?

Will the Chinese market usher in a reversal opportunity?

In an exclusive interview with China Business News, Joshua Crabb, head of Asia-Pacific equities at Robeco, a large European asset management agency, said that the valuation of Asia-Pacific stock markets is already very low, especially relative to U.S. stocks.

Among them, the valuation of the Chinese market is very cheap. "International investors are still waiting to see further policies. Although there is a lack of beta in the general environment, compared with Hong Kong stocks and other markets, A shares are still a very large, very broad, and very diverse market. So we see a lot of opportunity here, especially for 'bottom-up' stock pickers."

Some Asia Pacific markets are already very cheap

　　Kleb said that at the beginning of the year, the market did not realize the seriousness of inflation and did not pay enough attention to the high level of core inflation, but now that the risk of Fed tightening has been more fully priced in by the market, the risk has declined, and it has become more The big uncertainty lies instead in geopolitical risks.

　　Vanguard Group expects the Fed to raise rates and work to bring inflation back to its 2% target.

The Fed will announce its next interest rate adjustment on November 3, and it is expected to raise the interest rate by 75BP for the fourth time, bringing the interest rate target to a range of 3.75% to 4%.

Currently, the market expects interest rates to climb to a range of 4.6% to 4.8% next year.

　　While the rate hike is still on the way, Kleb said valuations in Asian equities already look very cheap compared to history, especially compared to the U.S. market.

At the same time, inflation is obviously not a big problem in Asia, because Asia does not have the huge amount of monetary and fiscal stimulus like the United States, and inflation is not a problem in China.

　　As far as September this year's data is concerned, the year-on-year CPI growth rate in the United States was as high as 8.2%, Indonesia's 5.95%, South Korea's 5.58%, Vietnam's 3.94%, Japan's 3%, and China's 2.8%.

While the strong dollar has weighed on Asian markets, a lot of value has started to emerge after the market rout.

　　In fact, Asian equities have been resilient against the backdrop of sharp U.S. interest rate hikes this year - EM ex-China equities fell 24%, almost in line with developed market equities (-21%).

Morgan Stanley recently argued that this resilience relative to developed markets is unusual in a global bear market, and is due to a number of factors, including Asia-Pacific markets kicking off a rate hike cycle earlier in the cycle.

　　Specifically, Kleb believes that Vietnam, Indonesia, and South Korea all have good layout opportunities.

Since the beginning of this year, international and local funds have poured into the Indian stock market. "India can tell a good 'fundamental story' (demographic dividend, urbanization process, manufacturing development), and foreign capital actually began to take profits in the second half of this year, while The hype from local buyers is stronger, but rising oil and food prices may further impact the market, and India's valuation is already 3 standard deviations higher than emerging markets, which poses a problem for investors to buy a good The fundamentals are paying too much premium. In contrast, the fundamentals of Indonesia, Vietnam are also good, and they are local markets, not too dependent on the global cycle, but have not been hyped to the level of India.”

　　In addition, many institutions are beginning to be bullish on South Korea.

“South Korea may be more vulnerable to the global cycle, but they do have some companies that have a good competitive advantage. Although the current earnings outlook for the Korean stock market has been significantly downgraded, the underlying companies are priced close to book prices. In other crises, these companies will not be much cheaper than they are today," Kleb said.

　　South Korea's composite Kospi index has fallen 23 percent this year, and the won has fallen more than 20 percent against the dollar in a year.

South Korea is seen as a strong "reversal candidate", Morgan Stanley said.

Emerging market stocks are still 6% away from the all-time bottom of the ERP (equity risk premium) after a further 5% decline in the MSCI Emerging Markets Index in October, and it's fair to say that emerging markets as a whole may still get cheaper, but The Korean market stands out for its strong long-term EPS growth potential and deep valuation discount.

If U.S. interest rates peak, it could well be the catalyst for a bear market reversal in South Korea.

China's stock market has more opportunities for "bottom-up"

　　The MSCI China Index, which includes China A-shares and overseas-listed Chinese stocks, accounts for 4% and 34% of the MSCI ACWI Global Markets Index and MSCI Emerging Markets Index, respectively.

Therefore, the performance of the Chinese market has a far-reaching impact on the overall index and has also attracted the attention of international institutions.

　　In October, northbound funds outflowed nearly 45 billion yuan from A-shares, and the cumulative purchase volume so far this year is less than 4 billion yuan.

Take Kweichow Moutai, a heavy foreign holding stock as an example, it fell by more than 27% in October, falling below the 1,400 yuan mark.

　　"I think if other variables are not considered, the Chinese stock market is very clear to 'buy', but because the market is still waiting to see the follow-up economic and policy changes, the wait-and-see sentiment is dominant, and I currently hold a more neutral view." Clay Bu told reporters.

　　But he said that now is not the time to talk about extreme underweight or extreme overweight, but should focus on "bottom-up" stock selection, and the Chinese market will still provide many opportunities.

"Themes such as 'import substitution, domestic autonomy' and carbon neutrality are always supported by policy and will not be affected too much."

　　In addition, Kleb believes that the "green theme" is a global theme with opportunities for a long time to come.

　　In the opinion of many institutions, as early as 2020, Chinese companies have rapidly expanded their scale and acquired mineral resources overseas. With this first-mover advantage, Chinese electric vehicle battery manufacturers now have a global market share of more than 55%, and production capacity accounts for more than 55%. More than 60% of the world.

In addition, 70% to 90% of the world's upstream component production is also in China, and will likely remain so for the foreseeable future.

The advantages of the supply chain allow China to continue to be a manufacturing hub for electric vehicles amid shortages in overseas markets.

"In the 1970s, Japan's energy-efficient small cars took off against the backdrop of stagflation and an energy crisis, and now Chinese manufacturers may have a similar opportunity."

　　“When it comes to power batteries, if you add the capacity of South Korea, Japan and China together, it is basically 100% market share. As geopolitical risks still exist, supply chain diversification will be an ongoing theme, and the industry’s long-term growth trend It won't change," Kleb said.