A growth investor discusses the investment scene in global equities, why he still sees value in China, has taken some Japan bets off the table after a strong run, and highlights his top stock picks.

Comgest, the Paris-headquartered investment house, enjoyed a banner year in 2023 and remains positive about a number of equity markets - with a large holding in the US - while still seeing value in the Chinese market, despite its slowing economy.

This news service sat down for an exclusive interview with Zak Smerczak, portfolio manager at Comgest. He managers its Irish-domiciled Comgest Growth Global Fund. The fund is heavily exposed to the US at 45 per cent, followed by Europe at 35 per cent, emerging markets at 12 per cent and Japan at 7 per cent.

Smerczak has cut his exposure to Japan as valuations in quality growth became expensive relative to growth expectations elsewhere. But he believes that now could be an interesting time to invest again in the country. Japan's Nikkei 225 benchmark closed at 39,098.68 on Thursday, beating its previous peak set in December 1989. (The fact that it has taken so long for the market to recover to where it was 35 years ago speaks to Japan's long period of sluggish growth.)

The firm’s investment philosophy is based on investing in a few high-quality long-term growth firms that can generate consistent returns in the long term, and which are insulated from macroeconomic trends because they are plugged into structural growth trends, and have strong fundamentals. Factoring in ESG criteria into investments is also important for the firm, it said. 

Smerczak's fund has net assets of €925.8 million ($997million), 35 holdings, and concentrates on healthcare, financials, consumer staples, industrials, materials, consumer discretionary, communication services and energy.

The fund performed well in 2023 and over a five-year period, but it was negatively impacted in 2021 and 2022. The portfolio also outperformed the index in January, driven by the strong performance of individual holdings.  

Top five holdings include Microsoft, which he has held for over 10 years, and US pharmaceutical company Eli Lilly since 2017, which has been a top performing stock, Smerczak said.

Another top five holding is Dutch firm ASML in the semiconductor industry, providing chipmakers with lithography. Smerczak thinks it is well positioned for the long term given that semiconductors play a key role in driving tech developments in super computers and generative AI. Top holdings also include chemical firm Linde and Taiwan Semiconductor Manufacturing Company (TSMC).

Last month, ASML and TSMC were among the largest contributors to portfolio performance. Industry players suggest a rebound in the sector following a year marked by inventory adjustments and reduced demand for electronics. TSMC anticipates sales growth of over 20 per cent in 2024. Eli Lilly also performed well, benefiting from the positive results of its competitor Danish pharmaceutical company Novo Nordisk, which excels in diabetes care, and which provided a robust outlook for the year.

Recent acquisitions include Dublin-based professional service firm Accenture, as well as global animal health company Zoetis, Smerczak said. EssilorLuxottica is another top 10 holding, producing optical lenses for spectacles and sunglasses. 

Detractors
HDFC Bank, Sika and AIA were among the major detractors from performance last month, the firm continued. HDFC, one of the largest private banks in India, reported weaker-than-expected margin and deposit growth. Sika, a large global producer of construction materials, announced disappointing sales in the fourth quarter. AIA, a prominent insurer in South-East Asia, continued to be impacted by weak Chinese economic data.

China
Nevertheless, although the Chinese economy is slowing, with its real estate sector under pressure, Smerczak still sees value in the Chinese market, especially in the liquid milk market where he holds China’s leading dairy producer, Inner Mongolia Yili. “This investment fits in with China’s growing middle-class and increasing demand for innovative, nutritious produce,” he said. “Despite concerns over China’s real estate sector, we have 7 per cent exposure to China in the fund and it outperformed in 2023.” He has trimmed the exposure slightly from 8 to 7 per cent in the past 12 to 18 months, notably in Chinese tech giant Tencent, in the first quarter of 2023. See more commentary here about China’s economy and outlook. 

Japan's stock market performance has benefited from shifts in global supply chains from China to Japan; corporate governance reforms that have unlocked cash held on firms' balance sheets in the country, a period of inflation that has ended Japan's multi-decade period of deflation, and the flourishing of Japan-friendly sectors such as AI and robotics. See more commentary here about investment opportunities in Japan.