As valuations hit historic lows and economic data picks up, Rebecca Jones asks whether China is a sound investment play once again, or if it is cheap for a reason.
Ben Willis, head of research, Whitechurch Securities
Twelve months ago, there were serious concerns China was facing a potential financial crisis but, in the summer, the government stepped in and injected the necessary liquidity. The Chinese government is in complete control and can take measures to stop things going into meltdown.
The big question now is how China will move to a domestic consumption-led economy. That is not going to happen overnight. At the moment, only 30% of China’s GDP is attributable to consumers.
China already has wage inflation and another longer term driver will be urbanisation, for which it is beginning to think about building better infrastructure. It is about making the populace better-off so they can afford more goods.
Is the country cheap enough to buy into again?
In 2007, valuations were very high and there were clear headwinds; however, we decided to look at the long term picture and recognised that, historically, Chinese equities look cheap. We took a weighting in GAM Star China Equity, which made it the only developing market we had a single country exposure to. We have done quite well from that.
Now, the data coming out of the country is slightly more positive and the view is that, perhaps, the economy has bottomed out and things are starting to recover. People are beginning to look at it again.
Our view has always been that China is a long term investment and that the GDP growth of a country does not necessarily relate to the returns from its stock market. You could play China tactically, of course, but we are long term investors and we are quite happy to hold at the moment.
Mona Shah, co-manager, Rathbone multi-asset portfolios
It is noteworthy that in November, China holds its eighteenth Third Plenary Session, which is significant in terms of policy and the future of China’s growth. For investors, the session could provide clues about China’s success over the next five to ten years.
In the near term, we expect growth to ‘normalise’ gradually into a lower range, coupled with more deleveraging and a changing structure in the growth drivers. We suspect this means headline GDP should stabilise around the stated target of 7.5%, although with some short-term weakness. In addition, inflation should be mild at around 3%.
China has changed from a net exporter to a net importer as the profitability of exporters has been hurt by real renminbi appreciation. Unless there is a wide sustainable pick-up in demand from Europe and other Asian countries, we remain cautious on Chinese exports.
More recently, data out of China has been more positive but, longer term, we are in a world of lower Chinese growth, which means there is an advantage to having locally-based managers.
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