Managers of China specific funds are finding opportunities among consumer stocks, which are benefiti...
Managers of China specific funds are finding opportunities among consumer stocks, which are benefiting from strong demand due to rising incomes.
Charlie Awdry, manager of the Gartmore China Opportunities fund, says China is now well established as an exporting powerhouse, and as such its economy is exposed to global economic growth. However, the government is pursuing measures to mobilise domestic consumption, such as allowing the currency to appreciate. However, this has negative ramifications for China's exporters.
"An appreciating yuan increases the purchasing power of consumers but squeezes the margins of exporters. For this reason we are cautious about the prospects of low-end Chinese manufacturing companies that are focused on export markets, as they are also suffering from increasing input costs. However, we continue to favour the domestic Chinese consumer stocks."
Shelly Kuhn, assistant fund manager at Neptune, shares this view. She said around 32% of the fund is invested in consumer stocks. The fund has a number of niche consumer plays, like Hengan, the tissue manufacturer. This company is benefiting from strong and growing demand across China for its products. Demand comes from both the poorer sections of Chinese society, where people are just beginning to buy toilet paper, and the more affluent city dwellers who are buying its disposable nappies and feminine hygiene products. "Hengan is the type of company we like; it has a large market share, quality management and a strong brand. Other consumer plays include investment in gambling in Macau and dairies," she says.
The other major theme within the Neptune China fund is energy, which accounts for around 30% of the fund. Companies such as CNOOC and Petrochina are key holdings.
Kuhn says: "Given that China is a net importer of oil and gas, these companies are assured a revenue stream. Additionally, the government recently relaxed its cap on the petrol price slightly, which had been introduced to protect farmers. We expect the petrol price to become gradually more market related and that the refining operations of oil companies will be more profitable as a result."
She says despite Petrochina becoming the most profitable company in Chinese history last year, half of the company is involved in oil refining operations, a side of the business that made a loss during 2005. Once its refining operations start to profit, the stock should perform even more strongly for the fund.
"Another positive earnings driver for the share price is the likely growth in the gas market. Gas currently provides just 3% of China's energy mix. However, it will gain importance as the government increasingly focuses on environmental issues. Petrochina accounts for 77% of China's natural gas production and controls 85% of its pipeline networks.
Meanwhile, managers are feeling more confident about the economy. The recent rate hike in China - the second within four months - sends a clear message that the government intends to moderate investment growth to more sustainable levels.
Awdry says although the second rate hike came earlier than most had expected, a further rate increase at this stage is part of broader efforts to slow the economy after a very strong first half and shouldn't come as a huge surprise.
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