Despite a healthy macro picture across much of Asia, the euro crisis and the US fiscal cliff are still key issues because of the effect on risk appetite, according to Toby Hudson of Schroders.
Hudson, the group’s head of equity research Asia ex-Japan, is also the manager of the Schroder ISF Hong Kong Equity fund and has an AAA rating from Citywire.
He points out that global investors are the big drivers of the Hong Kong market so their willingness to take on risk really matters.
‘We’re reasonably relaxed about the macro health of most of Asia,’ he says. ‘but in the real world, what are the linkages? There are obvious linkages in trade, and that’s hugely important for Chinese growth.’
‘Asia can deal with a muddle-through scenario in the West. Because good companies can gain market share - what we can’t deal with is these huge dislocations, like a Lehman-style event.’
‘The way to avoid it is to focus on domestic stories, away from global plays. A muddle-through scenario is most likely.’
Much of Asia has enjoyed a ‘stealth bull market’ this year, Hudson says, ‘but you wouldn’t know that from the headlines.’
‘Traditional defensives have been very well bid this year, because of the search for yield, so boring old Hong Kong utilities are up 20% this year,’ he points out. Hudson has zero utilities in his Hong Kong fund, because they are too expensive.
Right now he likes the consumer discretionary sector in China. ‘For me that’s the logical place to go. I don’t think we’re at the end of a super-cycle for Chinese consumption.’
‘We’ve liked hotels and tourism, internet and healthcare in China. But I’ve never owned a Chinese steel company.’ Search engines in China, for example, are a way of playing the internet theme.
‘That’s where we’ve been putting money back, but I’ve been inching. And there’s a lot of noise and movement around index inclusions, so we’re happy to add to holdings there.’
Hudson, who took over the Hong Kong fund from Robin Parbrook in 2007, says his thinking has been influenced by structural concerns about the nature of Chinese growth.
‘Investment is channelled through state-owned enterprises. It’s very hard to get bottom-up conviction with the behemoths, to be sure that there are executives with the interests of bottom-up shareholders at heart. Hong Kong’s pulse these days is driven by what’s going on in China.’
‘But increasingly, there are global businesses in Hong Kong – obvious names such as HSBC, but also Chinese manufacturing companies listed in Hong Kong.’
‘There’s clearly been down-trading: Coke says carbonated drink sales are down, but water is strong. Consumption is clearly very related to the investment cycle as well. Which is why everybody watches China policy.’
'There are pockets of China that have done very badly. Construction related companies, banks didn’t do well for much of this year. But actually, mainstream Hong Kong, conglomerates and property – partly because China’s been struggling there’s a lot of capital inflow into Hong Kong, and that’s supported property prices. So asset prices have been strong.’
Over three years to the end of Novemeber Hudson has returned 28% in the Equity Hong Kong sector covered by Citywire's analysis. This compares to 10.7% from the average manager in the same sector.