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Schroders Remains Cautious On China, Likes India But Valuations Are Expensive

Editorial Staff

10 January 2022

remains cautious over Chinese internet stocks, concerned about the uncertain path of Beijing’s regulatory policy after the crackdown on sectors in 2021 such as video games, and after-hours/for-profit education. Elsewhere, it sees opportunities in India but the country’s market valuations are expensive.

New competition in the space of internet companies – in areas such as e-commerce and cloud computing – is also a reason for a cautious risk approach, Robin Parbrook, co-head of Asian equity alternative investments, and Toby Hudson, head of Asian ex Japan equity investments, said in a note.

“All told, we think 2022 will be a difficult year for China’s internet sector in terms of profitability. And this will come at a time when the economy is slowing and costs (such as workers’ wages and insurance) are rising,” the investment managers said. 

China’s regulatory moves in 2021 rattled domestic and international investors. So much so that renowned hedge fund figure George Soros has warned that Western firms putting money into the mainland’s equity markets are making a mistake. Trade tensions between the US and China, among other factors, have added to concerns. And the financial default of property developer Evergrande has also set off alarm bells. 

Turning to India, the Schroders managers said that a “healthy rebound” in domestic activity has helped India’s corporate earnings to recover. 

“We remain positive on the longer-term potential in many sectors in India. With improving infrastructure and the roll-out of digitalisation, the outlook for the Indian economy is more promising than for many other developing Asian countries,” the managers said. The problem in India is valuations, which have become stretched. However, there is still a huge backlog of Indian IPOs and placements to come which may throw up investment opportunities.”

Rest of Asia 
The Schroders managers said that some of the “best” companies in Asia are listed in Australia, Taiwan and Korea, citing areas such as healthcare, semiconductor manufacturing, batteries, or niches like bicycle manufacturing. 

“The outlook for Korean and Taiwanese markets remains heavily geared into the broader global IT cycle. Although profitability across most of the tech sector remains very strong, markets worry about a possible slowdown in 2022. This is based on the view that some of the increased 'work-from-home’ demand for technology products may fade as people return to the office, and be detrimental to related share prices,” they continued. 

“We think a flattening out of demand is more likely than a sharp drop off, as stronger corporate demand and a healthier smartphone and auto-related cycle can offset much of any WFH weakness,” they said. 

“Turning to ASEAN (Association of Southeast Asian Nations), we remain relatively cautious on the stock market outlook. The current make-up of ASEAN stock markets is not particularly attractive given the disruption faced by incumbent banks and traditional energy stocks from new financial technology and renewable energy,” they said. 

“This may change with new listings coming. Overall though, it is hard to get excited about ASEAN stock markets at the current time, particularly given the high valuations better companies trade on due to their scarcity,” they said.

The managers said cheaply valued areas such as banks, insurance and property could benefit from higher inflation and interest rates, particularly if inflation is more than a temporary matter. However, there are continued structural challenges for banks, for example, from e-commerce and fintech.