Value Partners may buy into more pain for Asia stocks in early 2019

HONG KONG (Reuters) - Asset manager Value Partners 0806.HK may trim its equities exposure into next year as U.S.-China trade talks enter a crucial stage, but a further capitulation in the market may also lead to attractive valuations, a senior fund manager said.

Kelly Chung, senior fund manager of Value Partners, attends an interview with Reuters in Hong Kong, China November 16, 2018. REUTERS/Bobby Yip

Valuations for Asian stocks are already historically low, but it is not the time to buy, given the uncertainty around the meeting between U.S. President Donald Trump and Chinese leader Xi Jinping at the G20 summit in Buenos Aires in two weeks, the Hong Kong-listed firm’s Kelly Chung said.

Chung, who started 2018 with 70 percent exposure to stocks, said she might be more defensive toward the end of the year.

“From about 40 percent equity exposure, we might go back to about 30 percent,” she said at the Reuters Global 2019 Investment Outlook Summit on Friday.

Asian stocks account for most of her equity portfolio.

Chung said she may even cut it to 20 percent, if no deal is reached at the G20 and Trump goes ahead with a hike in tariffs on $200 billion worth of Chinese imports to 25 percent from 10 percent and slaps levies on another $250 billion-or-so of goods that escaped the initial rounds.

She, however, pointed out that there could be more correction early next year and that “the end of the first quarter could also be a good buying opportunity”.

The real effect of the current tariffs is likely to be felt in the first quarter as so far Chinese exports have held strong with U.S. buyers frontloading orders in anticipation of more levies, Chung said.

While these factors could trigger another round of sell-offs like the ones that turned Asian stocks into a sea of red this year, a further reduction in valuations from there would be akin to markets pricing an unlikely recession, she added.

Chinese stocks .SSEC.CSI300 have lost almost a quarter of their value in dollar terms year-to-date. Korean .KS200 and Philippine stocks .PSI have shed around 20 percent, while most of the others in Asia have dropped by at least 10 percent.

“Three out of 10 people in the market are still bullish. That’s still not bearish enough,” Chung said.

Apart from equities, Chung’s exposure is equally divided between high-yield and investment-grade fixed income, also mostly in Asia - traditionally the focus for Value Partners that manages $16.4 billion in assets.

Outside China, Chung favors countries with current account surpluses, such as Taiwan, South Korea and Thailand.

She has limited exposure to the United States, where valuations are high and the economy is showing signs of losing its strong momentum, and almost no exposure to Europe.

“We don’t want to touch Europe at this point in time,” Chung said, citing Italy budget risks and uncertainty around Brexit.

She added that a full-blown trade war, with more tariffs after the G20 summit, would prompt her to buy gold to hedge her exposures. XAU=

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Reporting by Noah Sin and Marius Zaharia; Editing by Himani Sarkar