JPMorgan Flemming Asset Management Asia-Pacific specialist Richard Cardiff says investors have nothi...
JPMorgan Flemming Asset Management Asia-Pacific specialist Richard Cardiff says investors have nothing to fear from exposure to China despite this being the Year of the Ram according to the Chinese calendar.
Traditionally the Ram does not bring as much prosperity or luck, but the Chinese economy is still in possession of a massive manufacturing edge, has a stable political climate thanks to last year's power shift to a younger generation of politicians, is now in the WTO and will keep attracting a massive amount of foreign direct investment.
" China is one of the most important macro events taking place," Cardiff says.
"FDI was $50bn-plus last year and could increase this year to, perhaps, $75bn. The GDP growth rate is not exact because of issues of data collection in the country, but whatever figure you accept it is still growing strongly."
"The government has a 30-year plan for development. The coastal regions have started first, but development is pushing inland where the government is heavily investing in infrastructure projects. And there are lots of foreign companies queuing up to take part in the process."
Still, there are factors that mean investing directly in Chinese stock markets is too risky, which is why JPMF will continue to focus on companies doing business in China but that are listed in Hong Kong or Taiwan.
Direct equity investments are subject to risk discounts because of issues such as questions over management skills, currency conversion, and the struggle to get good data for diligence purposes.
However, companies based in the Hong Kong and Taiwan markets are doing booming business in China, and present a choice opportunity to tap into Chinese economic growth, Cardiff insists.
"We call them 'China harvest plays', where the majority of revenue is generated in China. For example, we are invested in a shipping company based in Taiwan, which is getting lots of business from China. In Hong Kong we are not looking at companies like HSBC, but rather the mid-caps with most of their operations in the mainland but with headquarters in Hong Kong."
"We use locally based Chinese speakers to go into China to question management. You can't rely on balance sheets alone, you need the qualitative data too. We then use our 12 Taiwan based and 4 Hong Kong based fund managers to obtain recommendations on stocks."
"Individual stocks are not something we like to name because some of them are illiquid, but in terms of themes consider the automotive industry. Just a small growth in the number of Chinese owning cars would equal the entire car production output of Japan. The move away from co-operative farms is creating massive demand for tractors and other agricultural machinery. General consumption is also growing."
"Looking at the Iraq situation, even if things to get worse it will only create more pressure to reduce costs, which plays to China's strength. The UK since the early 1980s , like other rich G7 economies has moved away from manufacturing, and today shouldn't be based on manufacturing. North Korea is, I think, pushing for money. China is unlikely to allow it to seriously threaten the use of nuclear weapons. China is going for stability."
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