Investors should consider quality firms in China and Europe with superior valuations that have executed very well despite the “dire” political and economic situations in these markets, according to Pella Funds’ Jordan Cvetanovski.
In the last two to three months, Pella Funds has been looking for opportunities in China and has increased its exposure to the region by “well over 10%,” said Cvetanovski, chairman and chief investment officer at the company. The firm’s strict focus on valuations has led it to regions other beyond the U.S., such as Europe and Asia.
He told CNBC’s Sri Jegarajah that the firm’s China investments may need more of a boost from the country, which is currently introducing more fiscal stimulus to revive its economy. Even if such steps are not taken, the investment opportunities Pella Funds selected have still executed well despite the volatility in the market.
Back in November, China announced a five-year stimulus package totaling 10 trillion yuan ($1.37 trillion) to tackle local government debt problems. The Beijing administration signaled more economic support will come in 2025 as it seeks to kickstart growth for the world’s second-largest economy.
“Any stimulus which we expect to happen out of the Chinese authorities would be extremely favorable for these companies, and given they have very low valuations and low positioning by global managers,” Cvetanovski said.
“We anticipate very strong returns, and we think the time is effectively now to position for this leading into the next year, given all the fear surrounding tariff wars and what have you,” he added.
Stock calls
Among the Chinese firms which are favorably priced and could benefit from fiscal stimulus are robot maker Midea Group, Hong Kong Exchanges and life insurer AIA Group, according to Cvetanovski.
He said Pella Funds has monitored Hong Kong Exchanges for many years and expects that it will benefit “tremendously” from a boost to markets and new issuances.
“One of the best quality companies within the region is AIA, the life insurer in Hong Kong, which is continuing to execute year in year out,” Cvetanovski said, adding that if the insurer were listed in the U.S., it would have a valuation that is 50% to 70% higher from day one.
Cvetanovski noted that Pella Funds has been a big proponent of the world’s largest contract chipmaker Taiwan Semiconductor Manufacturing Co. However, the firm’s interest in TSMC is an artificial-intelligence play.
European opportunities
Cvetanovski said that Europe has also had its share of political turmoil, with government collapses in both Germany and France leading to much uncertainty in the regional market.
However, traders’ wariness to invest in Europe, serves as a “great” opportunity for Pella Funds, according to Cvetanovski.
The portfolio manager mentioned French power-equipment maker Schneider Electric as an example of a firm that is increasing its expected growth rates and margin improvements despite the recent political instability in France.
Schneider Electric has been looking to capitalize on Europe’s digital transition and on the boom in artificial intelligence by investing heavily in its data center business. In July, the firm raised its 2024 financial targets on the back of record revenues and improvement in its profit margins.
Pella Funds also recently entered a position in U.K. engineering firm Spirax Group, formerly known as Spirax-Sarco, and in Swedish manufacturer Epiroc — a company which would reap rewards from a resurgence in capital spending on mining, Cvetanovski told CNBC.
“These are the companies that would benefit again, from China … delivering on fiscal stimulus. But on top of that, it doesn’t need it necessarily. They are just cheap and they’re growing, and we can justify what we’re paying for, whereas we generally, genuinely can’t justify some of the valuations in the U.S.,” Cvetanovski said.
