He warns that non-performing loans – or loans that are on the edge of default – are a much bigger problem in the region than investors realise and that an enormous number of companies will be susceptible should the bubble burst. "With any form of credit crunch in China, companies that are reliant on debt being rolled over will get into trouble quite quickly and that’s the real reason we’re underweight the region," he said.
"The government could bail out the financial sector but equity investors would probably get wiped out."
He added: "We’re very negative on Chinese banks. We think they have zero net worth so we have a zero weighting to them."
Beyond his fears about the banking sector, Pidcock says profitability in China is likely to be weak in the near future, because the country received too much investment in too many sectors.
He adds that the fact the renminbi has held up so well against its western counterparts, namely the US dollar, has put China at a further disadvantage: other Asian countries have seen their currencies devalue, making their exports more competitive.
Although Pidcock has been cutting his exposure to China, he says there are still opportunities to cherry-pick quality companies that are not at the mercy of the country’s economic growth.
He highlights furniture manufacturer Manwah, which he says will benefit from a resurgence in the US housing sector, increasing its exports to the world’s largest economy.
On Newton Asian Income’s recent performance, Pidcock says May was unusual for the fund and admits it didn’t hold up well in the downturn. He says there are two reasons for this – investors were taking profits from companies that had surged ahead in the early part of the year and a knee-jerk reaction following the US Federal Reserve’s plans to taper QE.
"The talk of tapering and bond yields rising [was a cause for concern], but this now seems to be reversing," he said.
The manager warns investors are likely in for a rocky summer and that there could be more downside in Asian markets.
However, he says the Newton Asian Income fund still represents a defensive way to play the region, pointing to its diversified characteristics and the fact it has no more than 4 per cent in any one of its 70 stocks.
He adds that he has become more cautious following the market sell-off in May and has increased the cash level in the fund to 3.5 per cent
"When I look at the whole portfolio, I think this is well-positioned," he said. "It’s not so skewed that if we get something wrong it’s going to hurt too much."
The manager has come under criticism for his views on the Australian dollar, which has lost a significant amount of value in recent weeks. However, he is sticking by his belief that the country has plenty of opportunities and defensive characteristics and says the currency's decline represents a buying opportunity rather than a reason to sell.
"[The Australian dollar] remains a hard currency. It probably appreciated too much like the Norwegian kroner," he continued. "Now is a buying opportunity for high-quality Australian companies. There’s not a single Australian company in the portfolio I’m tempted to sell or even trim."
He adds that even though Australia exports much if its commodities output to China, it is not wholly dependent on the country and can readjust its exports to take advantage of growth in other parts of the world, namely the US.
Newton Asian Income is one of the best-performing funds in the IMA Asia Pacific ex Japan sector over one, three and five years.
Since launch in November 2005, the fund has gained 172.15 per cent compared with 121.11 per cent from the index and 110.94 per cent from the sector, according to FE Analytics
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is yielding 4.6 per cent – the third-highest figure in the sector behind Schroder Asian Income Maximiser and Henderson Asian Dividend Income.
It has been less volatile than both the sector and index over the past five years, with an annualised score of 18.2 per cent.
The fund has seen a massive amount of inflows in recent months, but the sell-off has seen it pull back to roughly £3.8bn in size.
Pidcock says there are no concerns over liquidity in the portfolio, although Newton is reviewing this on an ongoing basis.
He points out that there are no segregated or overseas mandates, so the fund is comparatively small versus its peers.
"We continue to welcome flows into the fund," he said.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.16 per cent.
