Next Two Weeks Important For Markets (Radio)

Mary Manning, Ellerston Asia and India Portfolio Manager Portfolio Manager, joined Bryan Curtis and Haslinda Amin on Bloomberg radio – Daybreak Asia and discussed her thoughts on the potential phase one trade deal signing as well as some of her stock picks.

Click Here to Listen on Bloomberg

Q: It is a very big week this week on the macro and micro front. We have seen a number of signs here that investors are starting to get a little bit more confident and I won’t run through them for you but I know you see them as well. Is it enough, do you think, to create some momentum here or do we need a big catalyst?

A: I think the upcoming APEC meeting where there’s expected to be some sort of signing of the phase one of the trade deal is definitely going to be a catalyst. We’ve been going through these trade war negotiations for two years now and the pattern of the market is getting in, is buy the rumour and maybe not sell the news, but definitely be in before the news actually happens. I think in the next two weeks are important as we get more information on what that phase one is going to look like. Over the weekend we had some comments from both China and the US and there is supposed to be more communication in the next few days. I think the people will continue to get positioned for that news. That’s what I am doing in my portfolio. Earlier in the year I was very high cash and I’ve gone to around 5% cash over the last month.

 

Q: What about the earnings season? Earnings have exceeded lowered expectations but we’ve also seen a big downward cut in next year’s estimates. What would this mean for trading trends in the coming weeks and in the coming quarter? When it happened last year, it led to the worst fourth quarter of the bull market.

A: That is a really good point. I run a pan-Asia Fund and it is a little bit country specific in terms of who have seen big earning downgrades and also sector specific. In China, some of the Chinese banks have reported over the last few days; they look like decent results. Last quarter you saw the Chinese internet companies (specifically e-commerce) do very well. Alibaba and JD had amazing results and I’m expecting good results again this quarter. So there are some pockets that are doing quite well. I run a growth Fund so we don’t hold Industrials and old economy stocks and those are the ones that in my opinion, are missing earnings.

Elsewhere in Asia, India has not had a great earnings season. The economy has slowed down a bit and you see that in earnings. I think if you pick your countries and if you pick your sectors well, you can get through this earnings season with quite a positive outlook.

 

Q: I want to touch on Hong Kong. Twenty one weeks of protests and data due in Hong Kong this week expect to show possibly a technical recession is under way. Is that caused to stay away from Hong Kong – you underweight Hong Kong, yes?

A: Yes, I am quite underweight Hong Kong. As you correctly mentioned it’s been twenty one weeks which is a long time. People were hoping for protest fatigue something similar to what happened with Occupy Central. But I think hoping for protest fatigue is probably going to be disappointing. I am underweight Hong Kong firstly because I run a growth Fund and a lot of large cap stocks in Hong Kong just don’t meet my growth criteria. But I think that this situation, unlike the trade war where there is a clear path to some sort or resolution, in the Hong Kong protest situation I don’t see very much of a trajectory to get to a resolution.

Of the five demands of the protesters, one of them has been met with formal withdrawal of the extradition bill. But the other four, I don’t see coming to a conclusion any time soon, so I am going to remain underweight Hong Kong.

 

Q: There’s very little movement on either side but one of the only things you saw was this report that was in the FT and then we followed up with our own reporting about the possibility that Carrie Lam will resign but as I see from your notes, that doesn’t really change too much it’s the structure, it’s the system that the protesters are not happy with; I mean sure, they are not happy with Carrie Lam but there is so much more. You do have some picks here and I noted AIA is one of them. Unfortunately we’ve got some bad news and that’s very much related to the protesters as well.

A: I only own two stocks in Hong Kong and one is AIA and the other is Hong Kong Exchange. The bad news for AIA you are referring to, is the earnings that came earlier this morning. I actually don’t think that is that bad because the stock has gone from almost HKD90 to HKD74, so a lot of the bad news has been priced in. And this as you may be aware, is quite early for AIA to release its operational data. It wasn’t due for another three weeks – so a bit surprising for us sitting at our desks this morning. The rest of AIA’s business outside of Hong Kong, continues to do well and I take a lot of comfort in that. They said that Hong Kong sales are down in line with the falling visitation which is quite significant. That is expected and I think that is why the stock price is where it’s at. I am actually expecting AIA to trade up when Hong Kong opens later this morning.

 

Q: I am just wondering though, given that the Hang Seng Index is tumbled almost 9% the last quarter which is the biggest loss among major global indices – is there value to be had if you  take a longer term perspective?

A: That’s a great question and to be honest I don’t have a very specific answer because there is a lot of tail risk in the long term. We have these three different scenarios for Hong Kong:

  1. Status Quo and you just continue on
  2. The protests will get meaningfully worse
  3. China will get involved militarily

Using upside/downside analysis under those different scenarios – the downside is very far down. It is not that there is 5% upside in one scenario and 5% downside in another. If things got very bad and China was involved militarily and Hong Kong lost its special status and the peg broke that is so much downside, it is not very tempting for me to bottom fish even at these sorts of valuations.

 

Q: Why do you like financials?

A: I break financials into three different buckets:

  1. Banks
  2. Insurance
  3. Non-Bank financials – brokers or exchanges or asset management

In the portfolio, right now I have a preference for Insurance, as you mentioned AIA, Ping An and China Life. In the Banks, I only like banks in countries where there is high GDP growth and where interest rates are still high.

You can watch Mary’s Bloomberg TV appearance here – Ellerston Capital’s Manning Reduced Cash and Added to China and Tech

AUTHOR
Mary Manning

Mary is a member of the investment team and is a Portfolio Manager for Ellerston’s listed investment company, Ellerston Asian Investments Ltd. Mary has over 17 years investment management expertise and joined Ellerston in 2012. Mary first worked in Asia in 1997 and has been investing in the region since 2001. Prior to joining Ellerston Capital, Mary worked at Oaktree Capital in New York and Singapore. In Singapore, she was the sole person responsible for financial sector investments for the firm’s Global Emerging Markets Hedge Fund.

Mary also worked as an investment analyst at Soros Fund Management in New York, the investment vehicle of George Soros. She focussed on investments in the financial sector in the US, Asia, including Japan and Europe.

Mary has a PhD in Economics from the University of Sydney, an MBA from Harvard Business School and a Bachelor of Commerce degree from the University Of Calgary, Canada.

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