The China investment team at Fidelity Worldwide Investment is optimistic about Chinese equities in the new Chinese year.
While the Chinese economy is expected to slow to around 8% in 2012, the fast growing and increasingly affluent middle class and continuing government support will continue to support domestic economic activity.
Martha Wang, Portfolio Manager of the Fidelity China Fund – “China is at a cyclical juncture in terms of reversing previous macro tightening and at a structural juncture in terms of transforming its economic growth engine from export to domestic demand.
“China’s economic growth is expected to moderate as external demand from Europe and the US slows and domestic economic activity falls.
“After tightening for the past two years, the policy environment will be more benign going forward. The recent fall in inflation has given the government some room to ease its monetary policy. Headline gross domestic product 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. There are many opportunities in the consumption space due to attractive valuations. There are opportunities arising from the economic development of the inland provinces, as well as industry consolidation in many fragmented sectors.
“I am, conversely, cautious on the export sector, especially on those names that don’t have much potential to gain market share. I’m also cautious on defensive sectors such as telecoms, which has been widely regarded as a safe haven over the past two years. In terms of other risks, I see growth possibly becoming constrained by the slow development of the financial system relative to the real economy. Also, China is not self-sufficient in terms of energy or resources, which creates further pressure to make its growth model less energy and resources intensive.”
David Urquhart, Portfolio Manager, Fidelity Asia Fund – “I have returned to a slight overweight to China, as the government should start to loosen monetary and fiscal policy there as inflation concerns reduce and growth slows in response to the slowing global economy. This should help the growth of local companies.”
Anthony Bolton, President of Investments at Fidelity Worldwide Investment – “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 such as China.
“I am not saying that China is not immune to a slowdown in the developed markets, but I do not foresee a hard landing. The country’s growth rate will slow down, but it will still expand by about 7% to 8%, which will be very attractive compared with the rest of the world.
“Inflation was a key issue in 2011, but now that it is moderating there are clear signs of monetary policy easing. I think this provides a favourable backdrop for Chinese equities. We have already seen the People’s Bank of China reduce its reserve requirement ratio for the first time since 2008 and I think there is more loosening to come as the central bank’s focus shifts from inflation control to growth promotion. 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 also 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.
“In terms of portfolio strategy, I continue to be positive on the consumption and services sectors and remain underweight in exporters, commodities, infrastructure companies, banks and property companies.”
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