Will a slowdown in the growth of China’s gross domestic product (GDP) weaken the country’s equity markets?
“China’s growth has been spectacular over the past 20 years,” notes Martha Wang, Portfolio Manager of the Fidelity China Fund.
“Although growth has slowed, many economists still expect China’s growth to range between 7% and 9% over the next few years in line with the projection planned by China’s 12th Five-Year-Plan. This growth rate is very healthy compared to the expectation for growth in developed markets.
“Slower export growth and property investment are being offset by infrastructure investment and higher domestic consumption, driven by personal tax cuts and broad loosening policy, will help stabilise manufacturing growth.
“A slowdown in residential housing construction will affect growth. However, some of the slowdown in private property construction will be offset by social housing construction. The tightening policy of the property sector has been taking effect since Q4 2011 with adjustments in property prices nation-wide amid tier 1 cities seeing most of the price declines. Given how tight the policy is right now I do not expect the government to tighten any further from where we are.
“The price decline is likely to continue since this is a social issue, which the government is keen to resolve to maintain social harmony. The increasing disparity of living standards between rich and poor is a sore point for the government and much has been reflected on the recent rise in property prices in China which is no longer affordable for some sections of the society. I do not expect the market to collapse though. There is room to normalize some tightening measures such as availability of mortgage loan and property purchase restrictions.”
Ms Wang adds “normalisation of infrastructure investment such as roads and railways, which saw a big decline in investment post the March 2011 train crash, should boost employment and resultant consumption. China’s railway is one of the most congested in the world as it operates at full capacity, therefore requiring significant infrastructure investment. Railway construction is also one of the highest employers of migrant workers.”
This could help the share prices of companies in these sectors. “These include infrastructure names such as cement makers and infrastructure developers that build roads, bridges and tunnels and then collect tolls from them. I invest in some of the recycling names, sewage treatment company names and water supply names. Many of China’s industries such as cement, coal etc are fragmented. We are increasingly seeing the trend of industry leaders growing larger and smaller players either closing down or taken over.”
Other sectors that could also do well, including in terms of share prices, include consumer stocks. Ms Wang expects “as the middle class expands and their wealth level increases they will look to increase their comfort level and enjoy a better life.
“Some of the lifestyle names I invest in are eating out / wine names. Other sectors benefiting from people’s lifestyle change are leisure and travel names such as online hotel and flight booking service. Some of the broad consumption names also benefit in particular those benefitting from increasing consumption of women’s shoes and apparels in China. Retailers in second and third tier inner land cities are also benefiting.
“I believe the market has priced in most of macro risks already.
“When we look at the stock market prices now, there were only few periods in history of China’s market when valuations had been as attractive as it is now.
“My overall portfolio positioning is quite domestic economy oriented and I believe the consumption-related names will continue to perform,” says Ms Wang.
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