A man watches screens inside the Yangon Stock Exchange in Yangon, Myanmar. (Photographer: Brent Lewin/Bloomberg)

A $220 Billion Manager Says 2018 Is Good Year for Stock Pickers

(Bloomberg) -- Forget U.S. President Donald Trump’s threat of trade war with China, or the turmoil in Italian politics, or the on-again, off-again leadership summit between America and North Korea. None of those keep David Gaud awake at night.

To the Asia chief investment officer of the $220 billion Pictet Wealth Management, turbulence in the region’s markets is good news for old-fashioned stock pickers. Gone are the heady days of 2017 when long-only investors could buy a handful of big-name tech stocks and sit back and watch them surge. In their place is a market where value investing looks promising again, and where, despite all the noise, growth is still “very much present.”

Gaud has been buying Malaysian stocks after Mahathir Mohamad’s surprise election win last month, even though foreigners dumped them for five straight weeks. He’s been picking up bargains in China’s energy sector, and looking to identify the country’s drug distributors that will benefit from deeper industry consolidation.

"This year is difficult, but it’s positively interesting," Gaud said in an interview in Hong Kong. “It’s very challenging, but in the right way, because it’s clearly a year for those who are capable to have clear conviction and are able to implement it. It’s highly rewarding."

Asian stocks fell again in May, with the benchmark MSCI Asia Pacific Index dropping 1.2 percent to erase its gains for the year. Stocks such as internet giant Tencent Holdings Ltd., which drove the rally last year when it more than doubled, are posting more meager advances in 2018.

Gaud, who’s been in working in the financial industry for 21 years, says he’s bullish about Malaysia because of higher oil prices, a recovering currency and a quickly narrowing deficit. The new government bodes well for the country’s politics and economy, he said.

"Mahathir is lucky," Gaud said. "He is able to implement new policy at a time when economy is recovering. He’s got a chance to succeed."

‘Second Leg’

The 45-year-old Frenchman says diversifying is key this year as the old favorites "still work but not enough.” He declined to identify specific stocks, citing company policy.

Many opportunities lie in China’s reform to reduce excessive supply and accelerate consolidation that will benefit industry leaders, Gaud said. He’s been turning to energy shares that people have long avoided, and which trade at cheap multiples of earnings. He talks of a major oil player that “destroyed” valuation for years -- which he says may become attractive under new management. He says some investors are still scared to buy such shares.

“It’s a painful trade, because people used to lose money,” he said. “So they are very reluctant to get exposed again.”

Drug Distributors

By the same token, Gaud has been looking to play potential Chinese market consolidation in health-care distribution, he said, while declining to identify which stocks he bought.

"Suddenly you are no longer standing on one leg, you get a second leg, which has deep value, is decorrelated from the tech segment, not dependent on the latest Apple numbers, and rather friendly to inflation,” Gaud said of the diversification. “And it’s not correlated to the U.S. dollar.”

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South Korea

One market where Gaud isn’t so positive is South Korea. That’s partly because he sees the U.S.-North Korea talks as doomed to failure, at least for now.

“We always thought there wouldn’t be room for a full agreement, a full dissipation of the issue, in the short term,” Gaud said.

That doesn’t mean he’s changing his position on the country’s equities. He still expects them to trade at a discount to other emerging markets, partly because of North Korea, but also due to concerns about corporate governance. But the leadership summit between the two Koreas is actually a bad sign for the South’s stocks, he says.

“Every time the north and south have been shaking hands historically, the market has collapsed a few months later,” he said.

If anything, Gaud is worried about currency risk, such as a strengthening U.S. dollar, which could easily wipe out Asian stock gains even if investors make the right picks. But despite that fear, and the turbulence that’s whipsawed the market this year, he remains fundamentally optimistic about the outlook.

“You’ve got the growth that carries on,” Gaud said. “Growth is still very much present in Asia.”

©2018 Bloomberg L.P.

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