Brian Arcese, Global Portfolio Manager at Foord Asset Management discusses his expectations for 2023 and why Foord thinks China is presenting real opportunity this year. Foord’s International strategies make up a significant component of the Nedgroup Investments Stable Fund. 

US is looking expensive 

Brian Arcese, Global Portfolio Manager at Foord Asset Management says earnings expectations are too high, particularly in developed markets. “We are conservative in our expectations for the year. We expect inflation to stay high, although it is likely to come down in the period. We also expect earnings to come off, although our base earnings expectations are still for positive 3 to 4% growth in the US,” he says. 

Arcese points out that there is always a lag between rates rising and seeing the effects on growth in the economy, therefore he thinks economic growth in the US will slow down this year. “For this reason, we are cautious on expensive US markets, but we are more constructive in areas outside of the US, like Asia.” 

However, in spite of the US equity market looking expensive, Arcese says there are other asset classes that are starting to look more attractive, like fixed income. 

All eyes on Asia 

Arcese says Asia as a broad region is attractive because the middle class is growing so much more quickly than the middle class in other parts of the world. 

“We are also seeing attractive valuations in the region relative to developed markets. China for example is currently at 50% to 60% of where US valuations are trading, and while there will be some movement, we don't expect that gap to close completely. 

The other reason that we're quite constructive on Asia is, because as fundamental investors, earnings matter to us – and earnings growth in Asia and in particular in China is far higher than it is in the West, both in Europe and the US.” 

“So, in a nutshell, Asia is presenting faster earnings growth at less expensive valuations with the same quality of company and management teams on an individual company basis. That makes the region attractive for us,” he says. 

Why is China so attractive this year? 

China is still seeing significant growth in the middle class, which is positive for investments, but more importantly, according to Arcese, the regulatory overhang that has been impeding the technology sector for the past 18 to 24 months seems to have abated. 

“Companies are coming out of that now, which means this will turn from a headwind into a tailwind. Furthermore, we have seen the end of Covid Zero in China. While we expected this policy to end, it actually happened four to six months earlier than we would have anticipated. From a top-down standpoint in 2023 China has the combined effect of good growth, driven by growth in the middle class, as well as these additional catalysts that will spur this movement on even more,” he says. 

Any particular stocks you like in China? 

“Within that Asian bucket, we own companies like Tencent and JD.com which are generally known by the market. However, there are a few lesser-known names we are very constructive on: 

AIA 

As the middle class grows and more people create wealth, there will be more people wanting to put measures in place to protect their families – which leads to demand for life insurance, health insurance, property and casualty insurance – and AIA, as the first foreign insurer fully licensed to sell insurance in China is extremely well positioned for this growth. 

Trip.com 

Another stock we would highlight is Trip.com. Similar to the rebound we've seen in other markets, we are seeing a growing demand amongst Chinese consumers to travel and Trip.com, which is an online travel agent akin to Booking.com, will be a real beneficiary of that demand,” he says.