The managers of the £258m Invesco Asia (IAT ) investment trust have gone overweight the Chinese market despite fears Beijing’s zero-Covid policy could lead to further lockdowns and damage the economy. 

Citywire AA-rated Ian Hargreaves and Fiona Yang had remained underweight China last year as the government cracked down on sectors including gaming and education, but have increased the portfolio’s exposure by 5% since January to 34.7%, according to the June factsheet, to take advantage of low valuations. 

In last week’s annual report, the pair warned the government could react strongly if Covid outbreaks continue, such as with Wuhan going back into lockdown recently, presenting too much risk for the pair to commit any further.

‘China’s determination to adhere to a zero-Covid policy amidst an outbreak of the omicron variant has raised concerns that extensive lockdowns will lead to a sharp slowdown in economic activity and presents significant near-term policy uncertainty,’ Hargreaves (pictured below) and Yang said.

While maintaining a level of caution, the pair were largely bullish about the Asian market and China, in particular, which they believe offers the anthesis of US and European markets which are reaching the peaks of their cycles as monetary policy tightens. 

Although the pair attributed weakness in the Asian market to ‘China-related concerns’, their Chinese stockpicking meant the trust outperformed in the year to the end of April.

‘It is hard to get complete comfort on geopolitical risk for China, but we feel comfortable being slightly overweight in the current environment given the attractive valuations on offer,’ the managers added. 

They also credited positioning intended to profit from the market rotation away from expensive ‘growth’ stocks towards ‘value’ and more cyclical areas expected to benefit from reflation and reopening trends.

The portfolio’s underlying net asset value (NAV) fell 6.7% over the year, beating the MSCI AC Asia ex-Japan benchmark, which fell 12.9%. The shares fell 10% to trade at an 11.9% discount, which has since widened to 12.7%, according to broker Numis. The board raised total dividends for the year by 1.3% to 15.3p per share.

Consecutive years of outperformance put Hargreaves in the top tier of Asia Pacific managers with an income slant, with Yang (pictured below) appointed at the beginning of the year. She also manages the Asian Equity Income  fund, which has a similar portfolio.

The 4.6%-yielding trust has recorded outperformance over one, three and five-year periods. In the five years to the end of last week, the NAV was up 35.9%, compared to the benchmark’s 19%. The shares have delivered 36.6%. 

‘Stock selection has had significant positive impact on relative performance, particularly in Hong Kong and China and Indonesia, which has helped offset the impact of some of our underperformers in India and Taiwan,’ said the managers. 

Top performers over the period included wind turbine manufacturer MingYang Smart Energy, which made strong gains ‘as an expected beneficiary of the authorities’ plans to reduce carbon emissions.’

Real-estate developers CK Asset and China Overseas Land and Investment were also strong performers, with the shares moving up 7.5% and 20.5% respectively.

In terms of geopolitical risk, the pair believe China is too concerned with avoiding targeted sanctions from the US and Europe to make an aggressive move against Taiwan in the medium-term – although, the results were published on the same day US speaker Nancy Pelosi’s visit to Taiwan provoked a belligerent response. 

‘Regarding tensions between China and Taiwan, we have historically felt that the probability of some sort of military conflict between the two was very low on a medium-term view. If anything, we now feel there is even less chance of anything happening on this front any time soon.’

China’s determination to hit it’s 5.5% growth target for 2022 is likely to encourage stimulating policies once lockdowns are lifted, specifically targeting the consumption and infrastructure sectors, the pair said, pointing to opportunities in the shorter term.

Inflation in Asia is currently ‘at more comfortable levels’ and any warning signs of that changing, such as high credit growth and deteriorating external accounts, are yet to show up on the dashboard. 

The portfolio is well-positioned if those signs do light up. An overweight position in financials ‘stands to benefit from rising interest rates’. Another overweight position is the automobile sector, which could be at risk if interest rates rise.

‘We expect some margin pressure and can foresee big ticket items like car purchases being delayed if consumers are nervous about the outlook. However, the sector has yet to fully take advantage of pent-up demand, limited supplies and low inventory levels, suggesting less need to offer the usual discounts,’ said the managers.