Fidelity Worldwide Investment’s portfolio managers with an interest in China expect further easing in the country’s monetary policy, driven by Beijing’s need to inject more liquidity as money supply and economic growth has been softening and inflationary pressures easing. What will this mean for China’s prospects in 2012 and investors?
Martha Wang, Portfolio Manager Fidelity China Fund – “China’s economic growth is expected to moderate as external demand from Europe and the US slows and domestic economic activity falls.
“This means, that after tightening for the last two years, the policy environment will be more benign going forward. The recent fall in inflation pressure has given the government some room to ease its monetary policy. Headline gross domestic product (GDP) growth will depend on the balance between looser policies and weaker external demand.
“I am positive on the outlook for the next 12 months. There have only been a few periods in China’s stock market history when valuation levels have been as attractive as they are currently. Most of the macro risks have been largely priced in and the risk/reward outlook is very favourable.
“In terms of stock ideas, I favour the consumption space where I am finding many opportunities with attractive valuations.”
David Urquhart, Portfolio Manager Fidelity Asia Fund – “Slower global growth and the resultant lower commodity prices will help to reduce some of the inflationary pressures in the Chinese economy. This will provide policy makers a reprieve on what was expected to be further tightening measures.
“I have moved China from underweight to an overweight. Currently, China is trading at a forward P/E ratio of 9.5x, which is at a significant discount to its 5-year average of 13.5x.
“I am also definitely seeing more attractive buying ideas in China. In an environment of slowing global growth, the focus has shifted away from growth opportunities – where risks of disappointment are increasing, and more on the value opportunities that exist in the market. Typically when you see the P/E of a stock that is the same as the sustainable dividend yield you are getting a great buying opportunity. This is especially so when these companies still have good prospects for growth. Recently there have been an increasing number of attractive opportunities that have emerged.”
Anthony Bolton, Chinese equities portfolio manager – “The next 12 months should be a defining moment for Chinese investment when investors realise the economy is not about to collapse and the tightening period is over. We have been through an extraordinarily volatile year but I believe that when the dust settles and things calm down, investors will focus on relative growth rates they can get in different parts of the world.
“I feel very strongly that this will result in money flowing out of developed markets that have sovereign debt problems and very mediocre prospects over the next few years into the faster growing emerging markets like China.
“I am not saying that China is not immune to a slowdown in the developed markets. The country’s growth rate will slow down but it will still expand by about 7.5% to 8%, which will be very attractive compared to the rest of the world.
“Inflation has been a key issue in 2011 but it has already started to come down. A slowdown in inflation has allowed the Chinese authorities to stop tightening monetary policy. This should be positive for the markets. The speed and format of further loosening will depend partially on how the domestic situation develops from here and whether the developed world returns to recession.
“Some of the other issues that investors in China have been focusing on are bank bad debts and falling residential property prices. There are some real challenges regarding potential future bad debts, but the government has the financial resources to address these. The outlook for residential property in 2012 is poor. I am more concerned about the uncertainty due to the important political changes that are due over the next 18 months and whether they will lead to a change in policy direction.
“I continue to be positive on the consumption and services sectors and remain underweight in exporters, commodities, infrastructure companies, banks and property companies. Consumption and services are not immune to any slowdown in China, but I believe these are the areas with the best longer term outlook where structural trends favour them. Even with a slowdown in GDP growth, I expect these areas to outperform the general economy. If I am wrong about the world outlook, and a new recession were to commence leading to China embarking on another stimulus programme, these areas would likely be direct beneficiaries.”
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