The arrest of Huawei’s chief financial officer, Meng Wanzhou, in Vancouver in December came as a shock to many observers, but not to Jason Pidcock.
At the Wealth Manager Conference & Awards, the head of Asian dividend investment at Jupiter and manager of its £571 million Asian Income fund described the challenges and opportunities he sees in the region.
The ongoing tensions over Huawei and US claims that its telecommunications equipment could be used to spy on behalf of China have served to confirm Pidcock’s long-term cautious view on the country.
He said: ‘The way that the US views China has changed for good. Regardless of who is the president of the US, I think future presidents will now see China as a strategic competitor – or maybe you could say strategic adversary.’
The decision to request Meng’s detention and extradition on charges of fraud was ‘symptomatic of the US treating China differently’, he added.
‘History would suggest it’s quite normal for leading superpowers to treat up and coming superpowers differently than when they were quite a lot smaller. We all have to hope that relations don’t deteriorate too much.’
Pidcock (pictured) also said he thinks China has entered a phase where it will to have pump huge amounts of credit into the economy – with lending in January accounting for around 5% of China’s GDP – to keep up with unsustainable growth targets. ‘At some stage, I think all this debt in the system will cause problems. But I’m not sure that it will show up this year.’
Cards on the table
Despite such concerns, Pidcock identified travel, tourism and entertainment as ways of tapping China’s impressive economic expansion while largely steering clear of political risks.
He said: ‘In Asia, people are travelling more. They’re going not just on annual holidays, but on weekend breaks. That’s being led by China, but not just China. So, increasingly, Indians and Southeast Asians are going more frequently on holiday.’
In particular, gambling – which is banned on China’s mainland – is an increasingly popular pastime for the growing number of the country’s citizens who are able to afford to travel to resorts abroad.
‘To a degree – it is a cultural thing… it’s a battle of themselves against the forces of luck.’
In general, Pidcock prefers to buy listed companies in the developed markets of Hong Kong, Singapore, Taiwan, Korea and Australia – several of which are home to companies benefiting from this trend. In Australia, he holds Star Entertainment Group, which operates casinos in Sydney, Brisbane and the Gold Coast.
He is also invested in Genting Singapore, which operates one of Singapore’s two casinos: Resorts World Sentosa.
Another location is Macau, where Pidcock picked Sands China, which is the largest casino company in Macau by developed space and has the highest market capitalisation and dividend yield.
‘With all of those – particularly with Singapore and Australia – there’s an element of domestic demand. But a lot of the demand comes from tourists, particularly Chinese tourists’ he said.
Aside from the casino business, Pidcock likes to play the tourism sector by investing in aviation without holding airlines themselves. One such firm he holds is Singapore’s ST Engineering,ST Engineering, which maintains and refits aircraft on behalf of airlines, and also converts passenger planes for use in carrying freight. Another is infrastructure conglomerate NWS Holdings, based in Hong Kong, which is invested in a rail terminal consortium in mainland China and has a large aircraft leasing business.
Bucking Pidcock’s aversion to Chinese stocks, internet company Tencent is also seen as poised to benefit from the rising demand for entertainment services among consumers, thanks to its online computer games offering.
When it comes to what to avoid, Pidcock continues to be wary of India, as the country’s April general election approaches. The main issue for him is that equity valuations there are unfavourable compared with the rest of Asia.
Political risk is not a major worry, however, with the markets giving ‘close to a zero’ likelihood of the conflict with Pakistan escalating. More generally, Pidcock highlighted market liquidity as something investors should be thinking about.
With this in mind, his portfolio is around 86% invested in companies with market capitalisations of more than $7.5 billion (£5.7 billion).
He noted that the companies he holds tend to be larger than those of ‘some other investors’.
The Jupiter Asian Income fund lost 4.2% over one year, while the Asia Pacific Ex. Japan sector lost 8.4% on average, leading it to rank 8/206 in the peer group in the year to the end of January. However, over three years it continues to lag the sector, having returned 41.3% compared to 50.7%.