Happy New Year - the year of the horse begins tomorrow, and investors are advised to get a firm seat in the saddle as it's going to be a bumpy ride.
China is an emerging markets thoroughbred
According to Chinese fung shui this year of the horse will be explosive, dictated by the dominant element of fire. An expert talking to the South China Morning Post said that Hong Kong is likely to be "troubled by disputes, chaos and confusion".
But Matthew Vaight, manager of the M&G Asian (
Bronze rated) fund says that the only explosive thing about Chinese equities is their potential for upswing.
"China is an emerging markets thoroughbred; the largest country in the MSCI Emerging Markets Index, the most populous country on the planet and the world’s second-largest economy. After years of double-digit growth, however, China’s pace of expansion has slowed in recent years, and this deceleration has dampened investors’ enthusiasm," he said.
"Contrary to this mood of pessimism, we believe China currently offers interesting opportunities for long-term equity investors."
On both relative - compared to other emerging markets, and historic terms Chinese equities look cheap.
In the summer of 2007, China traded at close to an 80% premium to its emerging market peers. Today, following a period of significant underperformance, China trades at a discount.
"In both absolute and relative terms, we think China looks cheap," continued Vaight. "Many companies are trading on valuations that simply do not accurately reflect their fundamentals."
There are hurdles for investors to navigate however. The Chinese government is changing the focus of the economy. Policies are being introduced to reduce China’s dependency on export revenues and become increasingly self-sufficient.
Simon Pickard, head of emerging equities for Carmignac Gestion said that this change will mean having to stomach a lower-rate of growth – but at a pace which will still outflank developed economies.
“If you want to wean an economy off investment and reduce pollution you have to accept a slower rate of growth,” he said. “In the developed world governments do not allow countries to complete an economic cycle – in emerging markets they still have proper boom and bust. This business model has run its course and we have done well from it, it is time for something new.”
Many of the policies emerging from Beijing are presenting new investment opportunities – such as the decision to reduce carbon emissions in line with global targets.
“In the alternative energy space, both wind and solar power look interesting given the steps being taken to address China’s well-publicised pollution problems,” said Andrew Swan, manager of the BlackRock Asia fund.
“These sectors are already benefiting from momentum behind reform, and should enjoy the greater usage of wind power by the electricity grid and a reduction in excess capacity in the solar industry. Interestingly, pollution is also making the simple task of going out shopping more challenging, which will be to the benefit of online retailers.”
Dale Nicholls, portfolio manager of Fidelity Funds Pacific Fund (Bronze rated), and the man who will take over from Anthony Bolton to run Fidelity China Special Situations (FCSS) says there are plenty of thematic investment opportunities to be had in China.
“There is a genuine shift from the Chinese consumer moving their spending habits online, internet penetration is still well below that of developed markets and the move to online mobile is ongoing,” he said. “Like most favourites, technology company valuations were beginning to look a little stretched, but I think that selecting IT companies that have a track record in growing their earnings should prove rewarding.”
