Unlike astrologists debating whether the Year of the Rooster may actually be the Year of the Green Female Chicken, according to the Chinese calendar's counting system, asset managers broadly agree there is nothing but long-term opportunity in the world's fastest growing major economy.
Comments come as China goes into its traditional New Year’s celebrations, which will potentially see hundreds of millions of people travel to visit relatives.
This movement is one indicator of just how far the economy has come, and what opportunities are there for investors, says Mark Williams, manager of the F&C Pacific Growth fund, which has some 20% of its money in Hong Kong and China.
Growing numbers of economic migrants within China, coupled with growing incomes, is leading to a booming tourism industry.
Within China, this market has grown from around $2bn in 1990 to some $22bn currently, and it is expected to spill over the country’s borders as travel restrictions are relaxed.
Consumer spending is benefiting from the country’s growth rate, which has been reported at around 9.5% for 2004 - well ahead of expectations given moves to tighten monetary policy.
“We believe that it is domestic consumption which will be the main driver of growth over the next decade,” says Man Wing Chung, JPMorgan Fleming Asset Management chief investment officer of Greater China Markets.
Chung points to indicators such as the 10% growth last year in Chinese imports from other Asian economies as suggesting the process of domestic demand is well on track.
”Investors should be aware of how the Asia region itself also benefits from China’s impressive growth. China imports materials from its neighbours and in turn spreads this new-found wealth through the broader region.”
JPMorgan Fleming predicts China’s GDP will surpass that of the US by 2050, with the UK already or just about to be overtaken, and Japan passed within the next 10 years.
Michael Watt, manager of the Henderson Far East Income and TR Pacific investment trusts believes the growth rate will be strong again this year, albeit with the caveat he expects company profits to grow marginally less fast.
This is because slowing global growth may reduced growth in demand for goods made in China, while higher input costs in the form of raw materials prices will sqeeze companies’ margins.
Nevertheless, China’s long-term prospects remain very exciting as its people continue to build a consumer-based society from what is still a very low base,” Watt says.
Philip Ehrman head of Pacific and Emerging Markets at Gartmore sees earnings growth of Chinese companies of between 8% to 10% through 2005.
Dividend growth should be between 2.5% to 3%, implying this year will be much as last year.
Key to understanding investment opportunities is, however, to recognise there has been a qualitative shift in the growth experienced within the country.
Although 2004 GDP growth of about 9.5% was much higher than many thought, inflation - 2004 inflation was 2.4% after another month of lower price growth in December - has been falling even as the economy has been “broadening out”, Ehrman says.
Exports may have been up 34% in the fourth quarter, but retail sales were up 14%.
Also, foreign direct investment, primarily into facilities that can produce more goods, has been growing at a slower pace compared with previous years.
”This transition is important. It could be likened to a ‘soft landing’, although I would argue there has been no landing at all,” Ehrman says.
Overall, however, a good rule to remember is investors “need to be long on what China is short of, and short of what China is long,” implying a commoditity such as iron ore will remain a good China play because the country has relatively few such reserves, Ehrman adds.
Robert Lloyd George, chairman and chief executive of boutique asset manager Lloyd George Management takes an even stronger tack.
”It may be the year of the chicken, but it’s not time for investors to be chicken,” he says.
With a domestic stock market already valued north of $650bn, Chinese wages are rising by up to 40% annually in some areas - as evidenced by some price increases recently by US retailer WalMart, which is reported to account for nearly 5% of all US imports from China.
Effects of increasing incomes include China acting as a stimulous of inflation not deflation, and expectations - as per Mark Williams of F&C AM - suggesting numbers of Chinese tourists will increase massively - good news for airline and hotel stocks globally, George says.
So good do the long-term prospects look to LGM that it has just launched five new Oiec sub-funds - Asia Pacific, Developed Asia, Asian Small Companies, China, and Global Emerging Market Small Companies funds, which it says come on demands expressed by intermediaries and institutional clients.
One remaining issue that nobody can predict accurately is a revaluation upward in China’s renminb currency.
Robert Lloyd George says he expects an appreciation against the dollar, which is also likely to lead other Asian currencies to appreciate in value.
Henderson’s Michael Watt expects a revaluation of the renminb, but “possibly not in 2005”.IFAonline
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