The firm started to take positions in the energy and materials sectors in the fourth quarter of last year, Swan said at a briefing yesterday.
“In the past five years, the old economy has been suffering a lot from the economic slowdown, in particular the sectors with issues of overcapacity and falling prices. We’ve found opportunities to buy these stocks because people were too bearish about them in terms of valuations, but we haven’t really seen the structural changes in these industries.”
But now he thinks the landscape is changing. “We are now seeing new capacity additions being erased, as well as plans to take out existing capacity.”
He believes the well-managed companies that survive, with solid balance sheets and viable strategies, will have pricing power and start appreciating in value.
“But we have to be very selective,” he noted. The reform process could be a double-edged sword, and a real test for the country in the second half of this year.
“There is risk around that. There could be different outcomes for China. There’s potentially the Japan outcome, and the emerging markets’ income trap outcome.”
China’s new economy remains a “persistent trend”, Swan added. However, new economy stocks have high valuations and one needs to be selective in this area.
Balanced Asia exposure
More generally in Asia, Swan noted that equities have high premiums, meaning that valuations are low. “Investors are incredibly defensively positioned, and worried particularly about China.”
In the second half, markets are likely to be more stable than they have been the last few years, he said.
Swan expects the US Federal Reserve to be more dovish, creating a supportive environment for Asian nations to push ahead with fiscal policies or structural reforms.
The portfolio has shifted to a more balanced exposure between North Asia and Southeast Asia, he said. “We have been selectively adding [exposure] in Southeast Asia over the last six months, in Indonesia, the Philippines and Thailand.”