As the Sino-U.S. trade war roiled stock markets over the past year, China-focused fund manager Michelle Leung sat unfazed on her holdings of hot pot condiment maker Yihai International.
It was a good call. And not simply because people need to eat whether in good times or bad times.
Yihai, whose shares have surged nearly 900 percent over the past two years, are among a handful of high-conviction stocks that helped Leung’s long-only China equity fund shine.
In 2018, when the broadening trade war knocked the MSCI China Index down roughly 20%, Leung’s $200 million Xingtai China fund achieved an enviable positive return of 4.9%. During the Jan-April period this year, her fund delivered a return of 30.1%, according to the fund’s latest disclosure.
“The trade war is a big issue today,” said Leung, Hong Kong-based CEO of Xingtai Capital, noting the timing of any resolution to the dispute remains uncertain.
“No one has information edge on that. But we do have an information edge on the companies we invested in.”
That Leung and a bunch of fundamentals-based, bottom-up investors are thriving in China is evidence that the world’s second-biggest economy still offers plenty of opportunities for stock pickers, despite the risks of a protracted standoff with the United States.
Qi Wang, CEO of China-focused asset manager MegaTrust Investment (HK), said the company’s strategy has been to identify firms likely to achieve high growth “with or without Trump and the trade war.”
“The macro environment today is already so complicated”, so the stock-picking strategy needs to be simple, he said.
Based on intensive due diligence, MegaTrust picks stocks in sectors such as consumer staples, pharmaceutical and finance, while avoiding cyclical and export-oriented stocks.
That strategy contributed to MegaTrust’s relative outperformance. Its $600 million China-focused funds lost 15 percent in 2018, in contrast to a 25 percent slump in the benchmark CSI300 Index. So far this year, MegaTrust has delivered a return of 22 percent, based on latest disclosures.
CONSUMPTION BET
The consumer sector is also a focus for Xingtai Capital, which invests in Chinese companies listed both at home and overseas.
“The growth has to come from domestic consumption more in the next couple of years,” Leung said, adding China’s shift away from an export-led growth model will likely accelerate due to higher U.S. tariffs and Beijing’s tax cuts.
Leung shuns consensus names such as e-commerce platform Meituan Dianping or Alibaba, as well as companies which rely on exports for growth. After the trade war flared-up, she trimmed her exposure to a Chinese apparel firm that manufactures goods for international brands.
Leung bases her views on a microscopic research of her portfolio of companies, leveraging her experience as a former private equity investor.
“We have conviction in the stocks we hold … even in times like this, when the market is very volatile,” said Leung, explaining she would “drill down” into vulnerable areas of a company, talk frequently with the management and conduct channel checks.
David Dai, general manager of private fund manager Shanghai Wisdom Investment Co Ltd, agreed that the consumer sector is a safe haven.
Chinese consumer staples have risen over 10% in the past year, compared with a 14% slump in Chinese IT companies and a 4.6% drop in the benchmark CSI300 Index.
“The trade war has little impact on what you eat and drink,” said Dai, who holds stocks including milk tea maker Xiangpiaopiao Food Co and casual braised food maker Zhouheiya
“If you hold these stocks, you can sleep well at night.”