Why the “great rotation” is more than a one-hit wonder

Joohee An

Mirae Asset Management

In recent weeks, markets saw a shake-up off the back of positive news that included both a COVID vaccine breakthrough and Biden’s win in the US election. These events diverted investor attention and saw cyclical stocks drive a rotation through to value.

This rotation reminds us of a similar period in 2016. That year’s US presidential change led markets to a “reflation trade” with expectations for stimulus – which in turn led the value sectors of commodities and financials to outperform. But that rotation was rather short-lived and growth soon took the lead again from 2017.

We believe if the market rotation is driven by expectations of a Biden administration, it’s not likely to be sustainable – particularly given Democrats’ pledges of corporate tax hikes and increased regulation). Despite uncertainty of vaccines, we also expect the market will continue its rotation to value based on a significantly enlarged valuation gap between growth and value – currently at its highest level since dotcom bubble – and any positive news on vaccines or stimulus plans.

But as a stock-picker focusing on key beneficiaries of domestic consumption growth, typically growth companies, we believe the current market rotation will be less dramatic than in 2016.

Focusing on China, which represents close to 60% of our fund as at 30 October 2020, we believe consumption is normalising and expect this to continue into 2021. The fund focuses on the long-term structural growth opportunity and in our opinion, companies set to benefit are local brands highly favoured by Chinese consumers across education, health care as well as online related industries. Domestic tourism is an interesting theme as the world remains largely closed off to international travellers; domestic travel becomes a much powerful theme.

Continued emergence of local brands

In our articles from earlier this year, Guoacho: The rise of the homegrown Chinese labels and A make-over for China’s cosmetic industry, we detail the success and influence of local brands on consumers and their competitive landscape. 

The below chart showcases known Chinese brands covering a wide matrix.

Source: Company reports (logos used with permission) and Bernstein analysis

A company to look out for in 2021 is Li Ning, which we introduced earlier in the year. Li Ning is one of our top ten holdings. The company remained a top contributor to our fund’s performance through 2020 and will continue to benefit from the recovery through 2021.

Sports-related consumption in China is well supported by the government and Li Ning’s exports into global markets is also growing supported by sponsorship and marketing of elite athletes and cultural icons.

Below shows the continued growth of Li Ning even during pandemic.

Source: Bloomberg, 31 August 2020

Beyond traditional consumer sectors

Consumption is increasingly happening outside the traditional sectors. We aim to capture shifts in consumption patterns in addition to Asian consumer’s growing wallets. The Mirae Asset Asia Great Consumer Equity Fund is a bottom-up, high conviction portfolio taking a long-term approach with a qualitative focus.

One thing investors can't ignore in 2021

The above wire is part of Livewire's exclusive series titled "The one thing investors can't ignore in 2021." The series will culminate in the release of a dedicated eBook that will be sent to readers on Monday 21 December. You can stay up to date with all of my latest insights by hitting the follow button below.

Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

Joohee An
Senior Portfolio Manager
Mirae Asset Management

It's an exciting time to invest in Asia. Over the last 14 years, I've experienced first hand the growth and evolution of equity markets across the region. We're seeing a shift in global production and consumption. In Asia, Consumption Growth is...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.