Threadneedle thinks: viewpoint on China

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Evidence of a global deceleration at a time of moderating growth in China has prompted fears of a hard landing for the country by some investors. But as we reveal below, many of the factors worrying investors are more apparent than real.

We therefore see recent volatility as an investment opportunity, with the market overlooking a number of favourable developments set to benefit Chinese equities for some time to come. Recent concerns that the economy might be cooling miss the fact that this is exactly what the authorities have been trying to achieve. We agree that China will see growth slowing down going into the second half of this year, but that surely was the point of policy tightening! We are not concerned about a ‘hard landing’, past experience (notably the previous two slowdowns) shows China has been successful at achieving ‘soft landings’.

With deep cash reserves, the government is willing and able to spend its way out of a potential hard landing. Meanwhile, the country’s fiscal debt to GDP remains low at around 3%, giving the government ample financial strength to provide fiscal stimulus should the need arise. First quarter growth came in much stronger than expected, so it is a good sign that second quarter GDP is likely to dip below the high levels that we saw in the first quarter. We still think GDP growth is likely to be at 8% to 9% per year. At these levels, the expansion will continue to support a number of the themes that have made China such a rewarding place in which to invest.

Key themes include

  • Infrastructure: Fixed asset investment growth in 2010 was mainly driven by government-related infrastructure investment.
  • Consumpation: With consumption growth expected to continue, companies with strong brands and pricing power should be underpinned by robust top-line growth – helped by inflation. 
  • Automation: One of the aims of the latest five-year plan is to focus on increased mechanisation.  Although manufacturers are facing wage pressures, productivity gains are still outpacing increases in labour costs.

Evidence of a global deceleration at a time of moderating growth in China has prompted fears of a hard landing for the country by some investors. However, according to Threadneedle’s Gigi Chan, many of the factors worrying investors are more apparent than real. Whether looking at sectors benefiting from still strong growth or industries less favoured by the five-year plan, the key to maximising performance continues to lie in a stock-by-stock approach to portfolio construction. Investor nervousness illustrated by the recent market volatility provides an ideal environment for stock picking.

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