An Asia fund manager whose investments in China shares helped her beat 99% of peers over five years is becoming less enthusiastic and turning instead to its neighbor Japan.
Midas International Asset Management Ltd. is betting on Japanese technology firms and companies bolstered by the economy’s reopening and increasing consumer spending, according to Julia Yoo, a Seoul-based co-manager of the firm’s Asia Leaders Growth fund. Rising wages in Japan will likely boost consumption while a weakening yen may help draw in more tourists from abroad, she said.
The Korean fund had been bullish on China until earlier this year, but it has shifted its views because of sluggish consumer spending and insufficient policy support that are making the country take longer than expected to recover, Yoo said.
“People are traveling but they aren’t spending money,” said Yoo, whose fund oversees $111 million in assets, in an interview. “The Chinese market isn’t proving helpful to the fund so far this year.
The fund reduced the China portion of its portfolio to 19% as of the end of May, from 28% at the end of 2022. That compares with its Japan exposure that grew to 45% from 40% during the five-month period.
Gains in shares of Chinese companies such as apparel firm Li Ning Co., liquor maker Kweichow Moutai Co., Top Education Group Ltd. and Proya Cosmetics Co. had helped the fund return 9.2% in the past five years on an annualized basis, versus 2.2% for its peers, according to Bloomberg-compiled data. The fund is still outperforming its competitors so far this year, but only 56% of them, due to its large holdings in China until earlier this year.
“It’s time to manage China risks,” Yoo said, adding that the fund has also been reducing Shiseido Co. due to the Japanese cosmetics company’s big involvement in the Chinese market.
Japan could be a good alternative to China thanks to rising consumer spending that may lift reopening-economy stocks such as Oriental Land Co., the operator of Tokyo Disney Resort. Also supporting the nation’s shares are expectations that the Bank of Japan will stick with its easy monetary policy for now when many of its peers are still raising interest rates, and a boost to exporter earnings from the yen’s slide.
Restructuring in the global supply chain in the wake of US-China tensions is benefiting Japanese firms such as Panasonic Holdings Corp. and chip-equipment suppliers as companies seek to diversify their sources of supplies, Yoo said. The rally in shares of companies related to artificial intelligence and electric vehicle producers is supporting Japan’s share market, creating a virtuous cycle, she added.
Midas is particularly bullish on Japanese consumer-product companies such as Fast Retailing Co. and Asics Corp. that withstood Japan’s decades-long period of economic malaise, and now could see new growth potential in the US and Europe. The fund also increased during the first half its exposure to technology firms such as Panasonic and Advantest Corp. Other top picks include Keyence Corp. and Fanuc Corp., Yoo said.
There are some pockets of Chinese markets that are doing well, Yoo said, such as the semiconductor and EV sectors, where Midas has also boosted its holdings by increasing related stocks such as Li Auto Inc.
Still, China’s stock market recovery hinges on Beijing’s “going all-out in supporting the property market,” she said. Unless two key issues — the real estate market’s slump and high youth unemployment rates — are resolved, China will not be a “buy and hold” market, she said. That makes Japan the brighter alternative for Yoo.
“The momentum isn’t going to end in the short term,” the fund manager said. “Japan’s rally isn’t overdone.”
