There is no doubt that China’s economy is slowing and many investors have questioned whether China’s rapid economic progress of the last two decades is finally coming to an end. But are the opportunities for investors really over?
Not at all, says global investment manager, Threadneedle Investments.
Gigi Chan, Fund Manager of the Threadneedle China Opportunities Fund, said that while growth in China is slowing, she did not expect a hard landing. “We believe that China’s economic slowdown is simply a move to a more sustainable level as China makes the transition from an investment and export-led economy to a more balanced model,” she said.
A number of key aspects of the Chinese economy indicate that the long-term economic outlook remains positive. Domestic demand is increasing, led by wage rises, urbanisation and a widening of retail networks. In addition, consumption levels in China have huge growth potential. In developed countries, consumption levels are typically between 60-70% of GDP, whereas in China they account for just 30% of GDP.
Ms Chan added, “Looser monetary policy and reforms to the financial sector mean that the long-term outlook is good. Authorities delivered their first interest rate cut since 2008 in June, and we see this as a positive sign that policy makers have reacted proactively to the economic slowdown.”
Ms Chan continued by commenting on speculation among some analysts that surging property prices in China are at best troubling, and at worst comparable to the housing bubble in the US which precipitated the global financial crisis.
“The situation could not be more different,” she said.
“Whereas the US boom was driven by rising unemployment and over-lending, in particular to people who could not service their mortgages, in China wage increases are being driven by labour shortages and most consumers either pay cash for their new homes or put up very large deposits. Indeed, only a relative small proportion of Chinese have mortgages.”
Ms Chan concluded by saying that China still offers excellent opportunities for canny investors.
“At Threadneedle, we favour companies exposed to domestic consumption, partly because of long-term economic trends and partly because Beijing is likely to adopt more stimulus measures. Examples include the PC maker Lenovo, which has been gaining market share from the world’s top PC maker Hewlett-Packard. Belle International, the leading women’s shoe retailer, is another favoured holding.
“This very well-run company benefits from good inventory management and strong bargaining power with its suppliers. It has multiple brands, an excellent franchise and healthy cashflow-generating abilities. Stock picking is critical if investors are to profit fully from China’s potential, and we see plenty of potential.”
31 July 2012