Catherine Yeung – Investment Director – Fidelity Worldwide Investment

The following Q&A was extracted from a Bloomberg interview in Hong Kong with Catherine Yeung, Investment Director.

As the National People’s Congress gets under way in China this week, Catherine comments on the prospects for further market reforms, the current policy mix, the earnings season and overall investment environment in China. 

Q: How do you see China’s recent tightening measures in the property sector?
A: Generally speaking, whether it is property-related or the government’s overall policy mix, China’s new leaders are expected to maintain a ‘fine balance’ approach. The property taxes announced last Friday aren’t new measures (they are trying to curb speculative buying) and you could see some reassessment of them or they may be rolled out quicker in certain cities such as top tier cities versus second- or third-tier cities, where you’re likely to still see quite accommodative policy.

Q: Do you expect anything substantive from this week’s National People’s Congress?
A: We don’t expect any surprises as such and the government is likely to look at the themes which the previous government introduced, in accordance with the current Five-Year Plan. The more significant reforms will likely be announced at the end of the year, at the annual conference which begins in November, which is when the new Party will likely make their mark.

Q: How do you see the investment environment evolving in the next few months?  Are we going to see earnings growth in China this year?
A: Everyone is keeping a close eye on China. When you look at what has happened – the government started easing in the fourth quarter of 2011 and the markets didn’t really react until the third quarter of 2012. Usually markets react positively when the easing cycle starts in anticipation of growth but last year, given the global risk-off environment, investors wanted to wait for the economic data to actually turn.

We do expect a re-rating of Chinese equities. The earnings season has just started. Generally speaking, overall we might see some disappointing numbers. Earnings expectations in 2012 were too high. The market could pull back in the current earning seasons but this would offer a good entry point for many stocks. It’s important to focus on what the companies are saying in terms of their outlook.

Q: Do you think that the growth momentum in China has eased off a bit?
A: Yes, a bit, but nothing goes up in a straight line. Relative to the rest of the world, we are still seeing very positive growth.  Again, it goes back to keeping a balanced policy, so you don’t want to see growth getting too much out of control because then we need to move to a tightening bias.

Also, looking at A-shares, when you look at what the government and regulators are doing – promoting A-shares via the QFII (Qualified Foreign Institutional Investor) expansion etc, we’ve found some very interesting investment opportunities in this area of the market, especially given the attractiveness of multiples. 

Q: Is the rotation from ASEAN equities into China based purely on valuation?
A: Valuation certainly counts – China is currently trading at around a price to earnings ratio of 9.4x, the second cheapest in the region. The long-term fundamentals of ASEAN remain very attractive. However, in the short-term, it’s a very overcrowded market at the moment with valuations very high at around the mid-teens for the region.

Q: Are we going to see more efforts to break up state-owned enterprises this year?
A: It’s likely. Don’t forget, the Chinese are looking at opening up their market, allowing in foreign competition and promoting the private sector. So generally speaking, liberalisation will take place. Interest rate reform is also on the cards – allowing banks to set their policies and rates independently as we see in developed markets etc. So there are lots of interesting things going on and that’s another reason why the market is likely to be re-rated.

The post China likely to maintain a ‘fine balance’ appeared first on AdviserVoice.