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How to make the most of trade sanctions against China

How to make the most of trade sanctions against China

Investors should ignore sanctions placed on Chinese companies by the US government and use the opportunity to find resilient companies in the Asia Pacific region.

That is according to Martin Lau, who manages several Asia focused funds at First State, which includes the $555.6 million First State Greater China Growth fund.

Citywire + rated Lau said sanctions imposed on certain Russian and Chinese companies on August 22 designed to isolate the North Korean Government were purely a political move by President Donald Trump.

'Our take on North Korea is that it is a risk that we should consider. But, if it gets overplayed, which I don't necessarily think it is at the moment, it is usually a good buying opportunity,’ Lau told Citywire Selector.

'Unless you believe a full-blown war is going to happen and North Korea is going to fire a missile somewhere, it does seem that the market reaction to the North Korean tension has been quite mute.'

Threats and actions

Lau added that South Koreans had been living with threats from their northern neighbour for a long time and felt the threat of a war with North Korea was at normal levels.

He added that the amount of goods a company in the region still exported could indicate its resilience to noise in the market, such as the trade sanctions. 

'The export risk or trade protection risk is almost a given if you want to invest into certain competitive companies in Asia. When the risk is overblown, as it was at the beginning of this year, we invested into those companies which we believe are good and the share prices are down,’ Lau said.

Lau said examples of resilient exporting companies included semiconductor manufacturer Taiwan Semiconductor, which is the largest holding in the fund at 7.6% and electronics manufacturer Samsung.

Currency concerns

Foreign exchange rates remain a concern for exporting companies but Lau said there are other tests to help find good companies.

‘When everyone was concerned about the strength of the Japanese yen, it was also the best time to see which companies are the most competitive.

'While a strong currency is a major headwind for all exporters, those who manage to defend their margins while exporting their goods, means that the company is strong in terms of pricing power.’

Over three years to the end of July 2017, the First State Greater China Growth fund returned 16.55% in US dollar terms. This compares to a rise of 27.21% by its Citywire-assigned benchmark, the MSCI Golden Dragon TR, over the same time frame.

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