Active management has resurfaced to the spotlight, as the current market climate throws up both opportunities and challenges, according to UBS Asset Management.
‘The environment we’re in, we see a lot of winners and losers not just from the coronavirus, but from the trade war as well,’ said Geoffrey Wong, head of emerging markets and Asia Pacific equities, during a media briefing.
Case in point, rising labour costs in China and other parts of Asia have made some lower cost sectors less profitable, but the increasing consumption trend and healthcare have done very well, the Citywire AA-rated manager added.
‘If you’re able to do active management, getting into the winners and avoiding the losers, then you can get good returns. This is especially important in the small and mid-cap space, where you have inefficiencies and undiscovered gems that could give earnings growth,’ he said.
With the many market disruptions like a possible de-globalisation added to the trade frictions and ongoing crisis, there are losers being produced in the index which investors need to avoid.
‘The index return has not been great so I would discourage people from buying Asia ETFs from that perspective,’ Wong said, adding ‘Active is clearly the name of the game.’
Similar view was shared by Hayden Briscoe, head of Asia Pacific fixed income: ‘The active now is back, so over the last several years we point out to investors to not just chase the bond fund with the highest yield as it won’t actually give you the highest total return and that’s been borne out over the last three years now,’ he said.
This is a result of some managers purchasing distressed names to pump up the yields in the fund, but they remain underperformers relative to total return.
One space UBS is bullish on is in Chinese property names, backed by three trends. A demand driven by growing middle class and urbanisation, recovering property prices, and an improving profitability in the market.
‘We are seeing the property economy turning up, especially in China. This should continue boosting profitability. We continue to see a consolidation trend, particularly within real estate where the big ones continue getting bigger and bigger,’ Briscoe said.
The manager also offered an observation that is drive continued high demand in the Chinese property spaces. While most buildings from 1980s were built to last up to a hundred years in developed markets, the buildings in China only last about 25 years, he said.
‘So on an annual basis, there’s somewhere between 2% to 3% demolition rate of the entire national stock,’ Briscoe said, adding ‘Which keeps the housing demand still extremely high even as you get closer and closer to full urbanisation, which in developed markets tends to be around 80%.’