“While these talks are productive, a head fake or a dead cat bounce may be possible, should Trump's relationship with President Xi Jinping begin to sour again,” state Morningstar analysts Kai Wang and Kathy Chan in their May 12 report.
Nonetheless, Wang and Chan note that recovery is ‘imminent’ and highlights several sectors across the Asian markets that could benefit more than others.
“Certain sectors should see higher appreciation during the market upswing, with the technology, communication services and consumer cyclical sectors benefiting the most during the recovery period,” according to Wang and Chan.
Historically, the three sectors showed resilient recoveries back during the previous trade war between US and China back in 2018.
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Morningstar’s Asian technology index for instance bounced back 42.64% in 2019 after a 24.14% contraction in 2018 and its Asian consumer cyclical index rebounded 19.91% after a 19.78% pullback in 2018.
Hence, while some uncertainty does remain, Morningstar believes that currently discounted high quality names within the three named sectors could help investors ride the recovery wave while also remaining resilient to any possible short term pullbacks.
Under the communications services sector, Baidu and Tencent were recommended for their exposure to the long-term buildout of artificial intelligence and growing demand. NetEase was also another name highlighted by Morningstar for their great exposure to China’s domestic gaming industry growth.
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Morningstar’s fair value estimates (FVE) of Baidu and Tencent are HK$154 ($25.78) and HK$710 respectively, up from their current prices of HK$87.90 and HK$510. NetEase retains an FVE from Morningstar of HK$248 up from their current value of HK$164.80.
Consumer cyclical names like Yum China and JD.com are expected to benefit from tariff reductions reducing financial pressures on consumers, particularly benefitting JD.com as they further benefit from government stimulus.
Morningstar’s FVEs for Yum China and JD.com are HK$595 and HK$272 respectively, up from their current prices of HK$357 and HK$137.90.
On the technology side, Taiwan Semiconductor Manufacturing Company (TSMC) remains the only name on Morningstar’s list in the Greater China Region which can be attributable to the firm’s near-monopoly status as a chipmaker which will help them mitigate possible risks posed by uncertainty regarding semiconductor tariffs.
Morningstar puts TSMC’s FVE at US$262 ($341.60) which is a roughly 40% upside on its current price of US$186.98.
