As investor attention focuses on China's economic policy, managers are shifting their focus within the domestic consumption story away from more direct plays in consumer staples and discretionary to information technology and telecoms, reports fund research company S&P Capital IQ. This has continued into 2012, with a large percentage of managers continuing to hold sizeable allocations to internet related stocks such as Baidu and Tencent.
Baidu is a web based search engine, and Tencent offers users online gaming and social networking platforms. Both continue to report strong earnings growth numbers.
But Martin Lau, who leads the six strong China team at First State which runs funds such as First State Greater China Growth, said he is increasingly concerned over the valuation of Tencent, which is currently trading on a forward price/earnings multiple of 25x. He also does not hold Baidu as he thinks it is too expensive.
Mike Shiao, co-manager of Invesco Perpetual Hong Kong & China Fund, has a similar view to Mr Lau on Baidu and is waiting for the share price to fall below $120 before re-entering.
Mr Lau has recently added China Resources Enterprise to his fund on the grounds that its valuation has become reasonable. This company is one of China's largest brewers and retailers.
Another of Mr Lau's concerns is that inflation in China could be structurally higher for years to come. He does concede, however, that it depends how much more money is printed. He is also particularly wary of the property sector and cyclical companies linked to the country's boom in infrastructure and construction. He therefore retains a cautious stance with low exposure to banks, energy and materials offsetting the sizeable overweight to utilities and consumer staples.
S&P Capital IQ's survey reviewed 150 emerging markets and Asian funds.
