Geopolitics weigh on Asia markets, bamboo strategy goes defensive

Following some profit taking in major Asian markets in recent weeks, a market correction is likely as tensions rise in North Korea, as well as in US-China relations, and in the Gulf between Qatar and Saudi Arabia.

In addition, according to the managers of the Argos Bamboo strategy, the US Federal Reserve is beginning to increase rates, and there is every sign that the European Central Bank, the Bank of Japan and even the Bank of England will start to reverse their quantitative easing.

The strategy, actively managed by Hong Kong-based Lloyd George Management for Quaero Capital, invests in Asian companies that will benefit from the emergence and growth of domestic consumption in the fastest growing regions of the world. The investment strategy uses both top down asset allocation and bottom up analysis to build a concentrated portfolio. Stock selection focuses on strong cash flow generation and sustainable dividend yield.

The managers expect some correction in the real estate bubble in China and in Hong Kong will become clearer by August and will affect investors’ confidence. They have therefore increased cash to around 36% in the Bamboo Asia strategy, and also hold 8% in gold mining shares in Australia as an insurance policy.

Confidence remains regarding the long-term growth prospects of China’s technology sector — represented by Alibaba, Tencent, Netease, and the tourism/travel sector (China Lodging and TravelSky). However, the holdings in these large firms have each been cut from about 5% to about 1%, because of the expected correction.

The unlimited growth prospects of these large technology companies have now experienced some constraints and restrictions. In the West Google is now under heavy pressure from the European Union to reduce its monopoly, and in China Tencent and Baidu have both been heavily criticised by the Beijing authorities. The managers expect that the market leadership of the technology sector will shift, with a move back to more defensive sectors.

The team remains cautious in the short term, but very positive in their view of Asia beyond the next six months, given the extraordinary wealth creation and infrastructure build out observed during frequent travel around the region.

However, China dominates every market, including oil and commodities, and increasingly technology, so it is critical for a successful investment strategy to make an accurate assessment of Beijing’s policies.

Robert Lloyd George manager of QUAERO Capital

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