Asia Stock Funds Boost Reflation Bets on Value, Asean Shares

(Bloomberg) -- A blue sweep in the U.S. is intensifying Asian stock investors' conviction in reflation trades much like their global peers as they position their portfolios for the new year.

Funds from Invesco Ltd. to Samsung Asset Management are embracing cyclical and value shares as bets for higher U.S. federal spending and faster economic recovery strengthen the case to move away from expensive growth names. Meanwhile, political and regulatory uncertainties are prompting some investors to also avoid Chinese equities in the near term.

“I don't think that the Blue Wave has been fully factored into the market price,” said David Chao, a strategist for Asia Pacific ex-Japan at Invesco. “Keep in mind that the APAC region is the most exposed to cyclical factors and its economies and markets will gain relative to global peers.”

Having outperformed in 2020, Asia is leading global equity gains early in the new year. The MSCI Asia Pacific Index has climbed 4.2% so far in 2021, easily beating the S&P 500 Index's 1.8% advance. Europe's Stoxx 600 Index is up 3%. The Asian gauge was little changed on Monday.

READ: This Is What Asia's Stock Investors Are Betting On in 2021

Here's what some money managers are saying about their strategies:

Southeast Asia

While greater confidence that the pandemic is ending is needed for a sustained rotation, the valuation gap and early signs of improvements in earnings breadth support the rotation into cheap cyclical sectors, according to Adrian Zuercher, head of global asset allocation at UBS Group AG's wealth management arm.

A pickup in economic growth momentum will boost Southeast Asian markets such as Singapore, as well as India, he said, adding that commodity stocks may benefit from higher oil prices.

Samsung Asset also continues to prefer stocks tied to the economic recovery such as financials, industrials, energy, materials and cyclical tech, said Alan Richardson, a fund manager in Hong Kong. Price-taking sectors will benefit the most when there is global reflation as consensus tends to underestimate the strength of earnings recovery, he said.

Consumer, Agri Stocks

Invesco's Chao is bullish on Asian consumer discretionary shares as he expects 2021 will be the year for Chinese and American buyers to propel the global economic rebound. He also expects a catch-up rally in Southeast Asian equities on the back of attractive valuations, stronger earnings growth and benefits from vaccine rollouts.

Alex Wong, director of asset management at Ample Capital Ltd., sees value in China's agriculture sector. The country has “learned a lesson” from the U.S.' curbs on the chip sector, so it may try to reduce its reliance on overseas nations for agriculture products, he said.

Key Risks

While the Asian benchmark has hit successive records over the past few days, rising bond yields and commodity prices are emerging as potential threats to the rally, according to Wong.

Another risk, which investors seem to have broadly overlooked in recent days, is a resurgence of coronavirus infections and subsequent stricter movement restrictions, particularly in some Southeast Asian markets.

U.S. 10-year Treasury yields last week climbed above the psychological 1% level for the first time since the pandemic-induced turbulence in March. A gauge of the dollar touched the lowest level since February 2018.

“Bonds have been falling and eventually people may start to think ‘oh it's not too bad to buy bonds',” Wong said.

Surging commodity prices may eventually fuel higher inflation expectations, and may also hurt companies' pricing power, he said, adding however that for now, expectations of economic recovery and a weaker U.S. dollar are the key drivers for Asia stocks.

China Uncertainty

Even as the region's fortunes are closely tied to China's economy, David Wong, an investment strategist at AllianceBernstein, is favoring regional equities outside of China for the first quarter.

“There is a lingering shadow of geopolitical uncertainty as well as regulatory uncertainty that I think may affect some of the leading China index stocks,” said Wong, adding that the nation's equities remain attractive in long term.

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