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.

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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...

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