Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a658080
Year of the Snake: seven views on China
by James Poulter on Feb 11, 2013 at 13:56
As China welcomes in the year of the Snake, we group the views of seven investors on the prospects for the Asian dragon.
‘China is expected to witness a recovery across the board and government policy will continue to reverse from tightening to accommodative. Reforms on industry deregulation across the financials, telecommunications and energy sectors are expected to break the monopoly of state-owned enterprises and set the stage for fairer competition in order to revitalise the private sector.
‘China’s inflation will rise and asset values may reflate in 2013 on the back of improved economic conditions and market liquidity. The re-rating of Chinese equities is expected to continue as the global economic outlook and corporate earnings visibility continue to improve. Finally, Chinese equities are expected to witness a rally in the Year of the Snake on an improved market outlook.’
‘With China’s leadership transition now complete, a series of reforms is likely to take place. In particular, deregulation across a range of industries, such as financials, telecommunications and energy, are expected to revitalise the private sector. In addition, more focus will be placed on the acceleration of urbanisation and income re-distribution. Overall, a more pro-consumption policy is expected to be in place to stimulate domestic demand and consumer sectors will continue to benefit from this.’
Vaight believes investors got carried away in 2007 and were in ‘bubble’ territory: ‘At the market’s peak, valuations implied that the average Chinese company was going to grow by 28% p.a. for the next decade. This was clearly highly unlikely,’
‘Today, you could argue that some investors have fallen out of love with China. Headlines over the past year have been dominated by talk of an economic slowdown, corruption and political risk. Valuations have fallen accordingly and the stockmarket is currently implying future growth of 4% p.a. Given the golden rule of successful investing, namely to buy assets when they are cheap, we believe that right now Chinese equities are worth a closer look.’
‘While there are undoubtedly some exciting, world-class firms in China, plenty are still poorly run and fail to generate returns for their shareholders. Corporate governance standards on the whole remain low, particularly in state-owned enterprises (SOEs) which make up a significant part of the market. These firms dominate sectors such as banking and energy and in our view are primarily run for the benefit of the state and society rather than their shareholders.’
Gary Greenberg: head of emerging markets, Hermes Fund Managers
'In the emerging world, the recent macro concerns were largely known and already priced into equity markets. As for China, although we believe the country is the midst of a partly self-induced liquidity crunch, we see a number of compelling long-term opportunities. One of the largest de-ratings amongst global markets has taken place in China, which touched 35x trailing earnings in 2000, to bottom at only 6.7x in late 2008. Trailing earnings are estimated at about 10.3x for 2012.'
'This decline was well deserved, as Chinese profits disappointed in 2008, as well as again in 2010 and 2011. The outlook has been depressed, with the market forecasting a small decline in earnings in 2012. With expectations for earnings so low, along with the multiple of the market, we see an anomalous combination for a cyclical market. Normally, one sees a high multiple for markets experiencing cyclically depressed earnings. In this case, both earnings and the market multiple are depressed.'
'We are finding many cheap Chinese stocks that – absent a complete economic collapse – are offering good quality balance sheets, revenue streams, profitability, and cash flow generation. In expectation of continued gradual global improvements, we have recently taken the Fund’s consumer discretionary position to a 10% overweight and are prepared to further increase the cyclicality of the portfolio in the coming months.'
A good example of a stock we have added recently is an operator of hotels and casinos in Macau. We have also added a restaurant chain and a retailer in China, as well as another retailer in Russia.
Over the next two quarters, we plan to reduce the consumer staple weight further and add to the cyclicality of the portfolio.
Jeff Chowdry: head of emerging equities, F&C
‘Looking at key factors, such as the Purchasing Managers Index (PMI), infrastructure spending and residential property sales, there are signs that all of these areas are picking up. Although we don’t expect double digit growth in 2013, all these areas indicate that the Chinese economy is likely to grow faster this year.’
‘This outlook is reinforced by the fact that we are in the first year of new leadership for the country. Historically, new leaders in China have tended to introduce structural measures, which lend credibility to the market’
‘As Chinese consumers increasingly have more discretionary spending power, it is areas such as these that are likely to benefit. A company that we expect to do well from this trend is China Life, an insurance company.’
David Li: Impax Asset Management
‘The smooth leadership transition in China in the last quarter of 2012 has removed a major source of uncertainty that was hanging over markets, and we approach the Year of the Snake with increased confidence for environmental and resource efficiency markets.’
‘We believe that one of the priorities for Xi Jinping’s new government will be a renewed focus on the execution of the 12th 5 year plan. The current 5 year plan commenced in 2011 and was labelled 'the plan for green growth'. The investment target for environmental protection and energy conservation in the plan was increased last year to nearly 5 trillion Yuan, up 45% on the original target.’
Li expects to see further commitments to urbanisation and rising living standards against a backdrop of increasing resource constraints and pollution issues.
‘The recent announcement of the aggressive new standards for vehicle fuel clearly shows the government’s commitment to improving air quality and is its first significant response to the heavy smog that has hung over many major cities this winter’.
‘The building of major environmental infrastructure projects forms a material focus, leading to a far more targeted stimulus for our sectors, unlike the very broad stimulus seen in 2009, which the Chinese government will be reluctant to repeat.’
Catherine Raw: co-manager of the BlackRock World Mining Trust
‘It may be the Year of the Snake, but demand for gold and the price traditionally climbs up ladders ahead of the Chinese New Year. There is a seasonality pressure for gold, with significant increases experienced during two key periods: the Indian wedding season and Chinese New Year. The monthly demand for it on the Shanghai Gold Exchange over the past six years suggests that in the lead up to the Lunar New Year, volumes rise considerably with over 20% of annual demand in December and January.’
‘Gold has a strong cultural affinity in both countries and is traditionally given as a gift. In China, this has gathered momentum, as people have benefited from a robust growing economy and rising middle classes with access to larger disposable incomes. In the last six years, volumes traded on the Shanghai Gold Exchange have increased by more than 2.5 times, suggesting this is a growing trend.
‘This evolution has occurred during a period where investors have sought out both the safe haven qualities of gold during periods of currency debasement and economic uncertainty and for its diversification benefits. These attributes have attracted both individual investors and central banks to the yellow metal, which when coupled with only modest supply growth from the gold industry has propelled it to outshine most other asset classes over the past decade, returning 384% (Source: Datastream to 31/12/2012 in USD).
‘This long term trend of growing demand coupled with challenged supply is highly supportive of a rising gold price. We expect that a growing economy and rising incomes in China will contribute to demand in the region continuing to grow.’
Ryan Tsai: senior investment analyst, Coutts
Tsai highlights the following 10 reasons why the Year of the Snake could be a charmed one.
- Exports revival
- Higher investment
- Easier corporate borrowing
- Resilient consumption
- Valuation re-rating
- Accelerating earnings growth
- Renewed fund inflows
- Cyclical opportunities
- Stable politics
- Economic reforms
Exports are climbing again, helped by stabilising demand from the US and emerging markets.
Beijing’s focus on infrastructure projects prompted a 40% surge in the value of railway construction and a 37% rise in planned new projects in the fourth quarter.
An accommodative environment for corporate borrowing has been critical to recovery. Signs of much easier credit include the increasing level of total social financing – a measure of overall new credit raised in the economy.
With improving labour markets and rising wages, retail sales are growing.
The ratio of prices to forecasted 12-month earnings (P/Es) for offshore Chinese equities (listed in Hong Kong) stands significantly below its long-term average.
Economic recovery could help companies accelerate earnings growth from a 3 per cent rise in 2012 to about 10% in 2013.
Investor interest in China has warmed up again after more than two years of lacklustre performance.
Cyclical sectors (which represent some 80% of the index weighting), including consumer discretionary, energy, financials, technology and real estate, are expected to deliver better returns due to improving growth.
Following the once-in-a-decade political leadership transition in Beijing, policymakers are now more focused on promoting long-term growth.
The above nine factors should drive a cyclical rally this year. However, meaningful progress on economic reforms will be needed for equities to re-rate sustainably higher in the long term.