• 

  Chinese Lunar New Year complicates figures out of China.

  Chinese trade: The Chinese trade balance swung from a surplus of US$31.86 billion in January to a deficit of US$22.98 billion in February. The result is distorted by the timing of Lunar New Year holidays.

• Tame Chinese inflation: Producer prices fell by 2.0 per cent in the year to February (median forecast was for 1.9 per cent decline). Consumer prices rose by 2.0 per cent over the year – the slowest growth in 13 months (median forecast 2.0 per cent).
• Seasonal increase in food prices: In February, consumer prices rose by 0.5 per cent after a 1 per cent rise in January (biggest rise in 11 months). Food prices rose 1.7 per cent, affected by Lunar New Year holiday celebrations while non-food prices were unchanged.

What does it all mean?

• Is the Chinese economy expanding or contracting? It’s a bit like the US. In China it is the timing of Lunar New Year holidays that complicates analysis. In the US it is the recent batch of harsh winter weather. But given the softness of inflation data it does appear that the Chinese economy has slowed in recent months, probably expanding in a 7.0-7.5 per cent annual pace, down from 7.5-8.0 per cent. The full extent of the slowdown won’t be known for a few months. But it appears a mid cycle pause is occurring as authorities attempt to deal with the effects of the shadow banking system and the pollution problem.
• But it is important not to read too much into the latest Chinese economic data. Lunar New Year occurred on January 31 so economic activity was pushed into January and potentially March as Chinese businesses shut down for the holidays in February. More details on the Chinese economy will be revealed on Thursday with retail spending, investment and production data for January & February to be released.

What do the figures show?

Chinese trade data

• China’s trade balance swung from a surplus of US$31.86 billion in January to a deficit of US$22.98 billion in February. Exports were down by 18.1 per cent over the year compared with a rise of 10.6 per cent in January while imports were up by 10.1 per cent after a rise of 10 per cent in January. Results are distorted by the timing of Lunar New Year holidays.
• Economists had tipped a 6.8 per cent lift in exports, 8 per cent rise in imports and trade surplus of $14.5 billion in February.
• Quoting customs administration data, Reuters reported that China’s crude oil imports in the first two months of the year rose 11.5 per cent from a year earlier, while imports of copper jumped 41.2 per cent and iron ore shipments rose 21.8 per cent.

Chinese inflation data

• The annual rate of consumer price inflation eased from 2.5 per cent to a 13-month low of 2.0 per cent in February, in line with forecasts. Over the month consumer prices rose by 0.5 per cent, below forecasts for a 0.8 per cent lift in prices.
• Food prices rose by 1.7 per cent in February after a 2.4 per cent lift in in January (affected by Lunar New Year holiday celebrations) with non-food prices unchanged. Over the year to February, food prices rose by 2.7 per cent while non-food prices were up by 1.6 per cent.
• Food: Prices of fresh vegetables rose by 8.2 per cent in February with fruit up 8.0 per cent. Meat & poultry prices fell 1.0 per cent with pork down 3.2 per cent (reflects higher pig numbers), beef rose by 1.3 per cent and lamb rose by 0.9 per cent.
• Other prices: Clothing prices fell 0.5 per cent in February; tobacco & liquor prices were flat; transport & communications fell 0.1 per cent; household equipment & maintenance prices were flat; healthcare & personal products rose by 0.2 per cent; entertainment & educational fell by 0.5 per cent (travel down 3.7 per cent); living costs (including rents, utilities) rose by 0.3 per cent.
• Producer prices (business inflation) fell by 0.2 per cent in February after a 0.1 per cent fall in January. Producer prices in February were 2.0 per cent lower than a year ago, the biggest annual decline in seven months. Economists had tipped a 1.9 per cent annual decline.
• Mining producer prices fell by 0.9 per cent in February to be down 5.3 per cent over the year. Raw material prices fell 0.5 per cent in February (down 3.2 per cent annual); machined goods fell 0.2 per cent (down 2.0 per cent annual). Over the year prices fell most in coal mining (down 10.2 per cent) but rose most in gas production (up 5.2 per cent).
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• The latest Chinese economic data will put downward pressure on commodity prices and the Aussie dollar while ensuring that interest rates are left stable for another few months. Traders and investors shouldn’t get too carried away given that activity data is released on Thursday. But if it is confirmed that the Chinese economy is slowing a little too much, authorities will be more confident to stimulate growth, especially with low inflation.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• The latest Chinese economic data will put downward pressure on commodity prices and the Aussie dollar while ensuring that interest rates are left stable for another few months. Traders and investors shouldn’t get too carried away given that activity data is released on Thursday. But if it is confirmed that the Chinese economy is slowing a little too much, authorities will be more confident to stimulate growth, especially with low inflation.

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Significant investment has been made in infrastructure and housing, which has driven the considerable growth in demand for steel and, as a result, for iron ore. James Eginton, Research Analyst at Tyndall AM, provides an outlook for both of these markets and explains why 2014 is set to be a year of transition as these supply and demand dynamics change.

The iron ore market

Whilst steelmaking capacity in China has kept pace with the surge in demand, it has been the supply of iron ore that has lagged and has, as a result, led to a quadrupling of the iron price over the past 10 years.

Key to the supply issue of iron ore has been the inability of the Brazilian producers to add incremental new supply to offset mine maturity, as well as the environmental and political challenges that have faced the world’s largest iron ore miner, Vale. Chart 1 highlights the inability of Vale to deliver net new tonnes.

The seaborne response to the Chinese demand for new iron ore has been led by Australia. It has been dominated by production increases from the incumbent majors, BHP Billiton and Rio Tinto, but has also been supported by the successful growth of Fortescue Metals which is now the fourth-largest iron ore producer globally. Chart 2 highlights the seaborne response from Australia versus Brazil, which has continued to find it difficult to add additional net tonnage to meet the ever-increasing demand from China.

The importance of the supply response is the main driver in reducing the key input cost into steel making – iron ore. The slow response of the supply of iron ore versus the more timely increase in steelmaking capacity has caused sharp spikes in the iron ore price and has led to low profitability of steel mills.

Supplementing iron ore over the past five years has been the high cost, low-quality domestic iron ore from within China. Ore grades in China are as low as 15% (versus the global benchmark of 62%) and require significant beneficiation (refinement) in order to be useful in the steel making process. As a result, a large proportion of Chinese iron ore sits high on the iron ore cost curve. Chart 3 highlights where the Chinese ore currently is assumed to sit at around USD 130 per tonne CIF (costs of production, insurance and freight).

In order for the iron ore price to fall, this low-quality tonnage needs to be removed from the market and replaced by lower-cost Australian and Brazilian iron ore.

2014 marks an important year in the supply-demand balance for iron ore, as it’s likely to be the first year since 2004 that the iron ore market will move towards a small surplus. The size of the surplus or deficit depends on assumptions surrounding Chinese steel consumption, but it is clear that 2014 will see significant additional iron ore produced at a lower cost than Chinese domestic ore. Iron ore supply additions will total close to 200 million tonnes with Rio Tinto, BHP Billiton, Fortescue and Vale contributing approximately 120 million tonnes of this new supply.

The expectation is that the iron ore price will fall from its current price level of around USD 130 per tonne towards USD 110-120 per tonne, with significant declines likely after the second quarter of 2014 and following the cyclone season in Western Australia and Brazil, which has the potential to cause significant disruption to seaborne supply.

Currently, 270 million tonnes per year (on a 62% iron content equivalent) is sourced from Chinese domestic suppliers. Morgan Stanley forecasts that within four years, 70 million tonnes per year will be removed and supplemented by seaborne supply (source: Global Metals Playbook: 1Q14, research paper, 22 January 2014). This is despite Chinese steel consumption growing by 2-2.5% per year in the same period (which should necessitate more iron ore consumption). Thus, the seaborne market, in particular Australia, will be important in displacing this domestic Chinese tonnage.

Looking to the medium term, the iron ore price is also likely to exhibit significantly lower price volatility than it has displayed in recent years. Chart 4 highlights the reason for the lower volatility and it surrounds the flattening of the iron ore cost curve.

Chart 4 highlights that in order to displace 200 million tonnes of iron ore demand in 2013, the iron ore price will need to fall by USD 70 per tonne due to the steepness of the cost curve. However, looking to 2018 and assuming forecasted supply comes to the market, the same 200 million tonne move in supply will only result in a USD 20 per tonne movement in the iron ore price. This will make the iron ore market far more stable in terms of pricing and should assist steel maker margins in the long run.

Nearer term, however, the steepness in the cost curve has the potential to create a volatile iron ore market. The current cyclone season in Western Australia and wet season in Brazil has already seen Port Headland and Cape Lambert closed for two days and Vale declare force majeure due to heavy rains in the south east of Brazil which lasted for approximately a week after Christmas.

The impact was seen in the iron ore prices which ran up to USD 139 per tonne and subsequently moderated back below USD 130 per tonne in mid-January on the resumption of normal supply. The cyclone season in Western Australia and wet season in Brazil will normally run through the first quarter and into the early part of the second quarter.

After this period, new iron ore supply and the potential for Indian iron ore stockpiles in Goa to hit the market threaten to force prices lower through the second and third quarters. The impact will depend on the strength of Chinese steel consumption and inventory levels.

Restocking of iron ore inventory by Chinese steel mills is unlikely to provide a catalyst to promote further buying in the spot market as levels appear to have returned to normal for this time of year, steel mill profitability is low and credit remains tight for steel mills and steel traders. Chart 5 highlights that despite restocking taking place over the second half of 2013, iron ore prices have been relatively stable. This also adds support to the view that the iron ore supply is finally catching up to Chinese demand.

India remains a potential catalyst for pricing volatility in iron ore in the immediate term. Whilst we do not expect the key exporting region of Goa to begin mining within the next 12 months, the issue is what happens to the 11.5 million tonnes of iron ore inventory that is sitting at the port, which the courts have recently approved for sale but had been previously been banned by the government. If this floods the seaborne market in the second and third quarters, it will materially affect the price of iron ore and is a key downside risk.

At this stage, it is expected that the majority of the tonnage will remain within India and be sold to Indian mills as they face concerns about iron ore supply going forward, particularly from the key producing region of Odisha. India has the potential to be a net importer of iron ore and steel in the next two years.

The steel market

The steel side of the story is a case of historically high input costs coupled with overcapacity, leading to margin compression and an industry that is seeing record steel production and consumption, but has been unprofitable for a number of years. China has been the key to global consumption growth but has also been the cause of significant capacity additions.

Market expectations on steel consumption growth for 2014 are around 3-4% in 2014, with Chinese steel consumption totalling approximately 800 million tonnes. By 2017, market expectations are for close to 1 billion tonnes of steel being consumed in China alone. To put this into context, 2013 world steel consumption was 1.6 billion (including 775 million tonnes from China).

Steel consumption is likely to shift during 2014 (and into the medium term) from infrastructure investment towards consumer products as Chinese consumers increase their spending on air conditioners, fridges and dishwashers. Infrastructure spending growth is beginning to moderate with significant investment in rail, roads and electricity having previously been made. This may also mean the shift in steel consumption from long products such as rebar used to support the steel structure in buildings and infrastructure projects to flat products including hot rolled coil used in products such as refrigerators. These two products are produced at different mills and at different quality specifications (with flat products being the higher specified product).

Despite the significant growth in steel consumption, profitability in the sector has been very weak. The key for steel spreads and steel mill profitability to improve in the near term appears to be input cost relief rather than steel price improvement. This is due to the low steel mill utilisation levels which are currently hovering just below 80%. It is assumed that mills need to operate utilisation rates above 85% in order to get pricing power. This is unlikely over the next 12 months. Chart 6 highlights how capacity additions have exceeded production over the past five years leading to weak utilisation levels.

As mentioned previously, there is some hope that iron ore prices will moderate over the next 12 months on the significant new, low-cost supply that is entering the seaborne market. This may lead to margin improvement for steel. Margin improvement is unlikely to be driven by significant price improvement for steel. In the near term, steel prices are unlikely to see significant upside as mill inventories have been high for this time of year, leading to lower levels of restocking and credit conditions in China for mills and traders remaining tight (see Chart 7). Growth in steel consumption above market expectations would be required for material steel price moves.

Looking to the medium term, one potential catalyst for a recovery in utilisation levels (and a subsequent recovery in steel-making margins) is Chinese environmental reforms which could have the effect of curbing capacity.

China has recently announced the closure of obsolete capacity with the plan to phase out 60 million tonnes per year of capacity in the Hebei region alone. A large reason for this push is due to the poor air quality in Beijing which has forced the government to act on air quality, particularly around heavily populated regions. The closure of the obsolete capacity could be the key difference. Past pushes by the government on environmental reforms have not been successful in improving air quality nor has it reduced new capacity.

The key issue in reducing capacity and pushing for environmental reform is that it runs counter to local government objectives on employment, with the steel industry being a large employer in many regions. For example, in the key steelmaking region of Hebei, 15% of workers are in the steel industry and it represents close to 30% of the region’s business income (which is taxable). This makes it a challenge and often puts the local government at odds with the central government. How the central government in Beijing is able to deal with this issue will have a significant bearing on whether net capacity closures are made or whether capacity closures in the region are merely replaced by new mills. It is too early to say which is likely to happen, but has the ability to be a significant upside to steel margins in coming years.

Conclusion

Overall, 2014 marks a transitional year for the steel and iron ore industry. It marks the first time since 2004 (excluding the global financial crisis) that the iron ore market will transition from being in a deficit position (where demand has exceeded iron ore supply) to a mild surplus. This is due to new supply, largely from Australia. At the same time, the Chinese central government has been pushing environmental reforms which could have the effect of improving steel mill utilisation through capacity closures. This is at a time when steel consumption continues to grow (albeit at a slower rate than recent history). As a result, the outlook for steel makers has begun to brighten with the potential for margin expansion and improved financial performance. India continues to remain unclear as to their position in the seaborne market for both iron ore supply and steel consumption. Political uncertainty makes it look increasingly unlikely that India will re-enter the export market with the supply of iron ore, whilst on the steel consumption side, growth in consumption is expected to be supported by internally produced steel. China too remains uncertain as to growth and the desire of the government to push environmental reform.

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Disclaimer: This document was prepared and issued by Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No: 237563 (“TIML”). The information contained in this document is of a general nature only and does not constitute personal advice. It is for the use of researchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation or needs of any individual. TIML is part of the Nikko AM Group.

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Look beyond Chine for opportunities: PM CAPITAL

PM CAPITAL has said that the majority of the Australian equity market appears to be fully valued, and with the growth forecast in China likely to decline, investors need to look beyond the generalised macroeconomic thematics (which tend to dominate peoples thinking) as they consider regional investment opportunities.  After consistently posting market leading annual returns since the Fund’s inception, the investment manager of the PM CAPITAL Emerging Asia Fund has said regional investors require a targeted, bottom up approach.

PM CAPITAL’s Kevin Bertoli said the investment team remains wary of risks to China’s growth outlook.

“Within our Asian Fund, exposure to the gaming and internet search/portal themes, with exposure to Malaysia, Philippines, Singapore as well as China, continue to drive our performance as did underweight positions in financials and commodities,” he said. “We see the biggest risk in Asia being China growth related and will remain cautious and selective as this slowdown reverberates around the region, given its importance to most of the neighbouring economies.”

“Our method is a research intensive bottom-up approach and despite the lower growth forecast, we are finding genuine value  in industries that are supported by rising domestic consumption or that are benefiting from changes to consumer consumption patterns. These structural growth stories coupled with sound business fundamentals, which are not largely impacted by the macro-economic environment, are our main target,” Mr Bertoli said.

PM CAPITAL’s sector leading Emerging Asia Fund recently posted another strong result in the last twelve months, recording a 45.1% return compared to the 16.8% growth in the MSCI Asia (ex Japan) benchmark.

Mr Bertoli said regional equity markets continue to be skewed to the financials and commodity sectors, which have a high presence of state owned industries. “We believe the outlook for these industries remain uncertain and do not present the best investment opportunities.”

“Currently only approximately 38 percent of the fund’s capital is invested in businesses operating primarily in China, with the balance allocated to companies focused outside of this, particular South East Asia as well as globally and cash,” said Mr Bertoli.

The one investment made during the last quarter was Malaysia based brewer Guinness Anchor Bhd, which is controlled by Heineken, whilst positions in China Resources Enterprise and PT Tower Bersama Infrastructure were closed out after reaching recent highs and internal target prices.

“We remain concerned about the sustainability of Chinese growth in the short to medium term and deliberately seek investment opportunity beyond China.”

The result continues the stellar performance run of the Fund, which has averaged a return of 21.9% per annum since inception in 2008, the corresponding benchmark return (MSCI ASIA ex Japan index) was 3.6%. The Fund has also generated a total return since in inception of 197.8%, outstripping the relevant benchmark many times (21.4% comparative benchmark return). The results are particularly notable given over the last six months the Fund has remained, on average, less than 80% invested.

PM CAPITAL believe the Australian dollar is over valued and results for this quarter were aided by a depreciation of more than 4% in the Australian dollar and the funds un-hedged currency position.

Fund positions

Investments in internet franchises form the largest single allocation of funds (35%) with positions in the Malaysian based iProperty Group, which has a similar business model to realestate.com.au and operates leading search sites across the region; Jobstreet, a SEEK-style online jobs business with a strong presence in Malaysia, Singapore and the Philippines, in which Seek has a 22% stake; and Baidu, a China-only internet search provider with 70-80% industry revenue share, whose position has been further strengthened by the departure of Google from the Chinese market.

“Gaming holdings were the largest contributor to the December results with ASX listed Donaco International, purchased in the September quarter, appreciating in value by more than 100% after receiving its gaming table allocation and a 30 year licence for its Casino in Vietnam adjacent to the Chinese border.”

“The PM CAPITAL investment style for the Emerging Asia Fund is a contrarian, high conviction one where investments are purchased on the merits of their risk reward characteristics, which typically reduces the investible universe to 15-20% of the market. It is a bottom up approach which also explains why our fund is likely to significantly differ in composition from a benchmark focused fund,” Mr. Bertoli said.

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• Chinese growth seems to be stabilising around 7.5%.
• Chinese debt levels have risen rapidly, but from a low base and the authorities are trying to slow it down.
• While the Communiqué of the much anticipated 3^rd Plenum was vague as usual from such events it is clear China is heading towards more reforms to increase the role of market forces as a means to unleash growth rather than more fiscal and monetary stimulus which runs the risk of being unsustainable.
• Chinese shares remain cheap pointing to the prospect of good medium term returns.

Introduction

It seems that every 6 -12 months the China perma bears roll out their worries again. At the core of such concerns are a bunch of structural issues: that China’s investment driven growth model is unsustainable, that its housing sector is overheated, that it has lost competitiveness and most significantly that it has taken on too much debt. However, much of these worries have been overdone. This note looks at why starting with the cyclical outlook.

Growth cycle stabilising

There is no doubt that the slowdown in China’s growth rate since 2010, when it peaked at 12%, to around 7.5% recently has caused consternation and unnerved investors. The uncertainty was made worse earlier this year by a patch of softer economic data, a mini liquidity crunch around June when the People’s Bank of China appeared to be trying to slow lending through the less regulated non-bank or “shadow banking” system and speculation that the new Chinese leadership of President Xi Jingpin and Premier Li Keqiang would tolerate much weaker economic growth.

However, since then concerns about China’s cyclical economic outlook have settled. First, Chinese leaders have repeatedly stated that the floor to acceptable growth is around 7 to 7.5%. For example Premier Li recently indicated that 7.5% was the lower limit based on an estimate that 7.2% growth is necessary to create 10 million new jobs each year which is what’s roughly required to cope with the migration of around 18 million people each year to urban areas.

Second, the liquidity crunch has eased with money market lending rates settling back around 3%, although there has been a recent spike to around 4% in an effort to mop up liquidity associated with capital inflows. They remain well below 13% peak seen in June.

Third, and perhaps most importantly Chinese GDP growth has picked up to 7.8% year on year in the September quarter. Consistent with this economic activity indicators have stabilised and perked up. October data showed:

• an improvement in business conditions PMIs with the manufacturing PMI in a relatively stable range since early last year, consistent with a stabilisation in GDP growth;

Source: Bloomberg, AMP Capital

• annual growth in industrial production running around 10.3% up from a low of 8.9% in June;
• retail sales growing 13.3% from a January low of 12.3%;
• electricity production up 8.4% versus 6.4% a year earlier;
• while growth in fixed asset investment slowed to 19.3% year on year, this is part of a rebalancing. More interestingly the slowdown was accounted for by slower investment by state owned enterprises with private firm investment stable at around 22% growth;

Source: Thomson Reuters, AMP Capital

• export growth appears to be trending up and import growth is solid at around 7.5%;
• while inflation has increased to 3.2% year on year this is  due to an acceleration in food prices. Non-food inflation is stable around 1.6% and producer prices are still falling;
• finally, while money supply growth has remained solid at 14.3% year on year, growth in overall credit has slowed to a still strong 19.5% year on year from a peak in April of 22% and 37% growth in 2009 as the Chinese authorities reign in credit growth that has been occurring outside the banking system, ie “shadow banking”. But this looks to be a controlled slowing rather than a collapse.

The overall impression is that growth has stabilised and improved a touch with no sign of a hard landing and inflation remains benign. With monetary and fiscal policy remaining growth supportive, exports set to benefit from stronger global growth and Premier Li targeting a 7 to 7.5% floor for growth we expect growth to run around this level next year.

Debt is a worry, but nothing to panic about

The biggest concern is that a rapid build-up in debt starting in 2008 has led a domestic debt bubble. However, there are several points to note. First, China’s aggregate debt level is not high by global standards. See the next table.

* Includes local govt debt of 30% of GDP. Source: IMF, BCA, AMP Capital

Second, the rapid rise in China’s debt level is partly a result of a very high savings rate and those savings largely being recycled via the banking system rather than via the share market which means savings are simply recycled into debt.

Third, reflecting its very high savings rate (around 50%) China is the world’s largest creditor nation with the world’s largest foreign exchange reserves. The risk of a typical emerging market crisis where foreign investors lose confidence is low as China is not relying on foreign capital.

Finally, there is no denying that the rapid increase in China’s debt is a worry if it continues and as rapid increases run the risk of poor asset quality. However, the authorities recognise this with a clear focus on slowing the “shadow banking” system and the new leadership indicating there is little scope for more monetary and fiscal stimulus and that the emphasis will be on economic reform to boost growth. While the Communiqué from the 3^rd Plenum was long on clichés around “deepening” and “perfecting” and short on detail it is clear the focus will be on reforms to allow market forces to play a more decisive role in the economy. While details will take time to be released and the reform process will be gradual its likely this will focus on deregulating financial markets and removing bureaucracy amongst other things.

What about the “housing bubble”?

Talk about a housing bubble in China has hotted up once more as house prices have picked up again. And reports of “ghost cities” continue to circulate. The reality is far more complex with an undersupply of affordable housing, low home ownership and low levels of household gearing where average deposits are around 40% of values and 20% of buyers pay in cash. Household debt is low at 30% of GDP versus 85% in the US and 100% in Australia. And with household income growing around 10% a year it’s hard to argue there is a bubble when property prices rose just 2% in 2011, were flat in 2012 and look like rising 10% or so this year. While there are oversupply conditions in some cities and bubble like conditions in some others, overall it seems the Chinese property market is a long way from a bubble.

The investment overhang, or is it?

Talk of the need to rebalance growth in China away from investment to consumption has been around for a while. Over time it will happen. But it will be a very slow process. First, despite the strong growth rate of investment in China, its annual level of capital investment per person is low compared to developed countries. See the next chart.

 Source: BCA Research

Second, China’s urban share of the population at 50% is up from 20% in 1980, but if Korea is a guide its likely on its way to 80% over the next 30 years. This means an extra 400 million people moving into cities. To achieve this will require massive investment in housing and urban infrastructure.

Finally, China has been able to grow so strongly because it hasn’t experienced the inflation and balance of payments crises experienced periodically by many underinvesting emerging countries like India, Indonesia and Brazil.

In short claims that China is overinvested and investment needs to fall sharply relative to consumption are misplaced.

Has China lost competitiveness?

With Chinese wages rising rapidly, concern about a loss of competitiveness is quite common. However, there is little evidence this is a major problem. First rapid productivity gains are offsetting labour cost increases. Second, Chinese exporters have been moving up the value chain to higher value adding exports like electronic machinery. Finally, Chinese export are continuing to gain share, rising from around 4% of total global exports in 2000, to 8.5% in 2008 to 12% now suggesting little sign of a loss of competitiveness.

The Chinese share market

Chinese shares are cheap with a price to historic earnings ratio of 11 times and a price to forward earnings ratio of 8.5 times. This makes it one of the cheapest share markets globally and is suggestive of good returns in the years ahead as it becomes clear Chinese growth remains solid.

 Source: Thomson Reuters, AMP Capital

Concluding comments

China is unlikely to return to the 10% plus growth of last decade. But growth does seem to be stabilising around a still strong 7.5% pace and many of the common concerns regarding China are overdone.

Dr Shane Oliver, Head of Investment Strategy & Chief Economist

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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Chinese economy firm growth, low inflation

Chinese activity and trade data were close to market expectations in May but inflation data printed below economist forecasts.

What do the figures show?

• Retail trade rose at a 12.9 per cent annual rate in May, in line with forecasts and up on the 12.8 per cent annual rate in April; Industrial production rose at a 9.2 per cent annual rate in May, a touch below the forecast average (9.3 per cent) and down on the 9.3 per cent annual rate in April; Urban investment rose at a 20.4 per cent annual rate in the first five months of 2013, below the forecast average (20.5 per cent) and down from 20.6 per cent in March; Trade surplus $20.4 billion in May (expectation $19.3 billion; $18.16 billion in April).
• Chinese consumer prices fell 0.6 per cent in May to be up 2.1 per cent on a year ago (forecast 2.5 per cent annual; April, 2.4 per cent annual); producer prices fell 2.9 per cent in the year to May (forecast -2.5 per cent; April, -2.6 per cent).

Why is the data important?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications?

• It would be difficult to concoct a more benign set of figures. Activity data such as retail sales, production and investment broadly printed in line with economist expectations; the trade accounts remain in healthy surplus; and inflation data printed below forecasts. Simply, with inflation well contained, policymakers have maximum elbow room. More stimuli could be provided if needed in the future, but at present the economy is faring OK.
• In addition, money supply growth, new lending and outstanding loan growth printed softer than expectations and fell short of the April results, reducing fears about excessive credit growth and future problems for the banking system.
• The latest data may seem dull, but it is just the mix of benign results that investors crave given current the uncertainty about future monetary policy decisions in the US.
• Aussie investors want solid but sustainable growth in China. Perhaps they would be happier with slightly stronger growth, but that could raise issues about sustainability. Still, inflation-adjusted retail trade grew at the fastest pace in five months in May.

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China: a sweet set of numbers

China’s annual inflation rate fell from 2.5 per cent to 2.0 per cent in January, in line with forecasts for a result near 2.0 per cent.

• Over the month inflation rose by 1 per cent (forecast +0.9 per cent) driven by a sharp 2.8 per cent lift in food prices. Non-food prices were up just 0.1 per cent in the month.
• Producer prices rose by 0.2 per cent in January after a 0.1 per cent fall in December. Producer prices are 1.6 per cent lower than a year ago (forecast, 1.6 per cent decline).
• China’s trade surplus narrowed from US$31.6 billion to US$29.15 billion in January. The result was well above forecasts for a surplus near US$24.7 billion. Exports rose by 25 per cent in the year to January (fastest rate in 21-months) while imports were up 28.8 per cent (fastest rate in 11-months). Both results were well above market forecasts.

What does it all mean?

• The perfect set of numbers. The Chinese economy is gathering momentum but at the same time inflation remains well contained. Effectively this is the sweet spot for policymakers. Healthy sustainable growth without an inflationary issue.
• In fact the ongoing deflationary environment for business inflation suggests price pressures will remain well contained over the near term. The key focus will be food prices. Seasonal factors and cold weather caused a lift in food prices late last year.
• Food prices soared 2.8 per cent in the month, driven by a 12.7 per cent lift in vegetable prices, but non-food prices were up just 0.1 per cent. Not only are there social implications with rising food prices but the risk is that higher prices may be passed through to other goods. In addition the data on exports and imports show that the Chinese economy is quickening, highlighting the need for vigilance on inflation.
• The trade balance result was certainly surprising and came in well ahead of expectations. Exports surged by the fastest rate in almost two-years in the year to January, while imports were tracking at the fastest pace in almost a year. And while the data bodes well for activity levels, it needs to be tempered with a dose of caution. The results were boosted by the early timing of Chinese New Year, with businesses in China ramping up shipments before closing down for the holiday break.
• Having said that, there have been clear indications over the past few months of an improvement in Chinese activity. After bottoming out last year, manufacturing, industrial production and even retail sales have been tracking higher. The recovery certainly looks to be on a sustainable footing, the challenge will be achieving firmer growth while keep prices pressure in check.
• Overall the latest data bodes well for Australia, and the Reserve Bank does seem more comfortable about the fortunes for Australia. And it is looking more unlikely that the Reserve Bank will be cutting interest rates in the near term given the improving global outlook. In the past few weeks the improvement in confidence levels and rise in share markets will be another reason that the Reserve Bank will keep interest rates on hold.

What do the figures show?

• The annual rate of consumer price inflation eased from 2.5 per cent to 2.0 per cent in January, above expectations centered on a result near 2.0 per cent. Over the month inflation lifted by 1.0 per cent, above forecasts centered on a 0.9 per cent increase.
• Food prices rose by 2.8 in January with non-food prices up 0.1 per cent. Over the year to January, food prices rose by 2.9 per cent (4.2 per cent annual in December) while non-food prices were up by 1.6 per cent (1.7 per cent in December).
• Food: Prices of fresh vegetables soared 12.7 per cent in January with pork up 5.2 per cent, meat & poultry up 3.2 per cent and fresh fruit up 4.3 per cent.
• Producer prices (business inflation) rose by 0.2 per cent in January after a 0.1 per cent decline in December. Producer prices are 1.6 per cent lower than a year ago in January after falling at a 1.9 per cent annual pace in December. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and had been declining consistently each month to September (3.6 per cent annual decline).
• The trade surplus narrowed from US$31.6 billion to US$29.2 billion in January. Economists had tipped a surplus near US$24.7 billion in January. Exports rose by 25 per cent over the year to January (forecast +17.5 per cent) while imports rose by 28.8 per cent (forecast +6.0 per cent).

What is the importance of the economic data?
China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?
The Chinese economy is strengthening, giving the Reserve Bank further reason to stay on the interest rate sidelines.
Chinese inflation is not a problem and indeed official forecasts suggest that inflation will lift to around 3.5 per cent in 2013 from 2.5 per cent in 2012.

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• Inflation still well contained. China’s annual inflation rate rose from a 30-month low of 1.8 per cent to 2.0 per cent in August, in line with forecasts. Over the month inflation rose by 0.6 per cent after a 0.1 per cent lift in July. Food prices rose by 1.5 per cent in August while non-food prices rose just 0.1 per cent.
• Business inflation (producer prices) fell by 0.5 per cent in August after falling by 0.8 per cent in July. Producer prices are 3.5 per cent lower than a year ago – a 34-month low.
• Data supports stimulus moves. The latest data supports the decision by Chinese authorities to approve infrastructure projects valued at US$157 billion.

What does it all mean?

• Effectively the latest economic data is ancient history. Recognising the economy needs a kick along, Chinese authorities have approved new infrastructure projects, such as highways, ports and airport runways, valued at US$157 billion. While positive for Chinese businesses and commodity producers in Australia, it won’t assist with the longer-term goal of shifting economy-wide spending away from the industrial sector to consumers.
• Inflation is under control with the only factor boosting prices in the latest month outside authorities’ control – namely food. So Chinese policymakers can afford to cut interest rates or reduce reserve requirements in coming months if growth continues to stagnate.
• The Chinese policymakers are adopting a softly, softly approach to economic stimulus. During the global financial crisis in 2008, China launched a 4 trillion yuan (US$630 billion) stimulus package. While that had the desired effect of insulating the Chinese economy (and to some extent Australia) from the crisis, the concern is that it may have been too much – leading to some over-heating of the property sector.

What do the figures show?

• The annual rate of consumer price inflation rose from 1.8 per cent to 2.0 in August, in line with expectations. Over the month inflation rose by 0.6 per cent, up from forecasts centred on a 0.5 per cent increase and up from a 0.1 per cent gain in July.
• Food prices rose by 3.4 per cent over the year to August (2.4 per cent in July) while non-food prices rose by just 1.4 per cent in the year to August (1.5 per cent in July).
• Producer prices (business inflation) fell by 0.5 per cent in August after falling by 0.8 per cent in July. Producer prices are 3.5 per cent lower than a year ago – a 34-month low. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and has been declining since.
• Industrial output expanded at an 8.9 per cent annual pace in August, down from 9.2 per cent in July and below forecasts centred on a result near 9.1 per cent. Production is growing at the weakest pace in more than three years (May 2009) and well off the highs of 20.7 per cent annual growth in January/February 2010.
• China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.2 per cent in 2012 to date (January – August), below forecasts (20.4 per cent) and down from 20.4 per cent in the seven months to July.
• Retail sales grew at a 13.2 per cent annual rate in August, up from 13.1 per cent in the year to July and in line with forecasts.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around the 10th of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• Chinese policymakers are doing what they have to, to support their flagging economy. China can’t rely on a fast revival of European, Japanese or US economies, so effectively it has to provide the boost that the world needs.
• The slowdown of the Chinese economy doesn’t appear to be gathering pace, but there are only tentative signs of growth bottoming out. The new infrastructure program will go some way in ensuring that the economic slowdown is arrested and clearly it is positive for Australian mining and energy firms. The only negative is that the boost to the Chinese economy has boosted the Aussie dollar, making it more difficult for Aussie companies.
• The new infrastructure program should ensure that the Australian Reserve Bank stays on the sidelines for a longer period.

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• Inflation well contained. China’s annual inflation rate fell from 2.2 per cent to 1.8 per cent in July – a 30 month low. The July result was marginally higher than forecasts centred on a result near 1.7 per cent. Over the month inflation rose by 0.1 per cent after falling by 0.6 per cent in June.
• Business inflation (producer prices) fell by 0.8 per cent in July to stand 2.9 per cent lower than a year ago – a 33-month low.
• Scope to ease policy. The slower pace of growth combined with other data showing that inflation is in control gives the Chinese authorities’ scope to inject further stimulus if necessary in coming months.

What does it all mean?

• There is no doubt the Chinese economy has slowed down over the past year, however it has been a self-induced slowdown to get inflation in check. And that is exactly what has taken place; non-food inflation is barely growing, while food inflation has also slowed dramatically. In addition producer prices (or business inflation) is now going backwards, down by 0.8 per cent in July to stand 2.9 per cent lower than a year ago – a 33-month low.
• And while the latest retail sales and fixed asset investment figures (spending on infrastructure, roads, power plants etc) were below consensus it is really backward looking data (a view of the economic landscape before the policy was eased). In addition the forward looking manufacturing indices seem to suggest that activity levels have bottomed out in recent weeks.
• The latest results provide a strong base to launch a sustainable growth story. Chinese economic growth of around 7.5-8 per cent, pickup in lending, rising domestic income and consumption, robust business investment and inflation below 3 per cent sound like the ideal economic landscape for solid longer-term growth. And when coupled with news in recent weeks that local governments have been ramping up stimulatory measures – tax cuts, consumption subsidies and largely infrastructure investment being fast tracked, it does suggest that Chinese authorities have successfully engineered a “soft landing” for their economy.
• Interestingly it does look like the recent fall in the headline inflation rate is waning and will bottom out in coming months. As such it is likely that policymakers will be careful not to crank up growth too quickly. The focus will shift to judging the impact from the two interest rate cuts implemented over the past few months. However policymakers still have avenues to stimulate if they deem it is necessary.

What do the figures show?

• The annual rate of consumer price inflation eased from 2.2 per cent to 1.8 in July – a 30-month low. The June result was marginally higher than forecasts centered on a result near 1.7 per cent. Over the month inflation rose by 0.1 per cent in July after a 0.6 per cent slide in June.
• Food prices rose by 2.4 per cent over the year to July (3.8 per cent in June) while non-food prices rose by just 1.5 per cent in the year to July (1.4 per cent in June).
• Producer prices (business inflation) fell by 0.8 per cent in July to stand 2.9 per cent lower than a year ago – a 33-month low. The annual rate of producer price inflation peaked in July 2011 at 7.5 per cent and has been declining since.
• Industrial output expanded at a 9.2 per cent annual pace in July, down from 9.5 per cent in June and below forecasts centred on a result near 9.7 per cent. Production is well off the highs of 20.7 per cent annual growth in January/February 2010.
• China’s urban fixed asset investment, such as spending on roads and power plants, grew at a 20.4 per cent in 2012 to date (January – July), below forecasts (20.6 per cent) and in line from 20.4 per cent in June.
  Retail sales grew at a 13.1 per cent annual rate in July, down from 13.7 per cent in June and below forecasts, centred on 13.5 per cent annual growth.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• Chinese policymakers spent the majority of the last year in tightening policy to get inflation in check; however the central bank underestimated was the escalating European debt crisis. The deeper recession in the Euro zone compounded the slowdown in Chinese exports. Importantly policymakers have been quick to shift to a more stimulatory stance in recent months.
• The latest Chinese economic data is encouraging for Australian businesses. China has successfully slowed its economy to a more sustainable growth rate. Now the challenge is to lift momentum, but not so far as to reignite inflation.
• China faces challenges – what country doesn’t. A key challenge is to rebalance growth in favour of household spending and the keep inflation under control. The Chinese economic data will alleviate global concerns that the world’s powerhouse economy was at risk of a hard landing.

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Market sentiment regarding China has become noticeably bearish, as the market fears growth in China will continue to slow.

They have been disappointed lately, with a range of Chinese economic indicators reporting on the downside and the country reported to be in its deepest slump since the 2008 global financial crisis.

A range of stimuli from the central government in Beijing also appears to have done little to boost the growth of the world’s second largest economy and its 1.3 billion people.

“But we are already seeing some signs that the growth slow-down is stabilising,” says David Urquhart, Portfolio Manager of the Fidelity Asia Fund, “at around the 7.5-8% GDP rate. 

“As GDP growth expectations have been revised down, the price to earnings (P/E) ratio of Chinese companies has also fallen to 8.3x [comparatively cheap versus its five year average of 12.1x and also versus the Australian market on 11.2x]. Yet earning per share (EPS) growth in China is expected to outpace that of Australia in both 2012 and 2013. As a result, Chinese shares that can deliver on current growth expectations are now looking attractive.”

Mr Urquhart notes “China is in the midst of rebalancing its economy, and GDP growth is shifting away from being heavily dependent on export growth and infrastructure spend, and towards domestic consumption. As this process of rebalancing continues growth rates will be lower than they have been over the past decade, but these changes will shift China to a more sustainable growth path.

“The composition of Chinese GDP growth has already begun to shift.  In the first half of this year, China’s GDP grew 7.8%, of which (a) investment growth added +3.9%; (b) consumption added +4.5% (so over 57% of GDP growth) while (c) net exports subtracted -0.6%. Only a few years ago growth was fairly evenly split between all three of these factors.
“Since the end of 2009 in the aftermath of the GFC, net exports have not contributed to GDP growth. Weak external demand from the US and Europe has removed this previously strong GDP growth driver.

“This also means that some micro data that was an indicator of growth in the past is now less relevant. For example, if one focuses on electricity generation growth, this has been growing at 1.48% year on year (YoY) in April and 3.25% in May.  However while this data is very relevant for growth in manufacturing/exports and infrastructure, it is not so meaningful in measuring consumption growth.  So by continuing to focus on this as an indicator of GDP growth could easily make one more bearish about China’s growth prospects than one should be. Consumption related data is now much more important an indicator of Chinese GDP growth.”

Mr Urquhart adds “in addition to rebalancing its economy, in 2011 China faced the challenge of high inflation. This saw the Chinese remove fiscal stimulus (eg infrastructure spend on high speed rail was frozen and restrictions on bank lending were put in place for key industries like cement, steel, real estate etc). In other words, monetary policy was very tight.  In 2012, with inflation now under control, we have seen some reversal of this tight monetary policy – RRR reductions, interest rate reductions and some easing in restrictions on bank lending.

“Unlike during the GFC, strong fiscal stimulus is seen as neither necessary nor desirable, particularly as we are starting to see some benefits of policy easing that should come through later this year.”

He suggests the latest HSBC PMI is one of a number of indicators demonstrating signs that China’s growth slow-down could be nearing an end. Other indicators also support this:

• China’s export trade grew 15.3% and 11.3% YoY in May and June after only 4.9% growth in April and shrinking in January 2012
• Industrial production growth has also accelerated from +3.8% YoY growth in Jan and Feb to +10.7% in June
• New loans by large banks doubled in the first half of July versus the first half of June
• Rail and highway investment rose by 34% month-on-month and 28% month-on-month in June versus 7% and 8% in May.

Mr Urquhart says “stable growth (rather than slowing growth) combined with attractive equity market valuations make China an interesting investment proposition. 

“Increased confidence that China can deliver GDP growth of better than 7% should see China’s flat equity market performance year to date in 2012, improve substantially. China’s growth concerns have been priced into the market at current valuations of 8.3x p/e and 1.5x book value.”

He notes “in other parts of Asia, we have also seen positive GDP growth surprises and/or positive earnings revisions – in countries like Singapore, the Philippines and Thailand – and have also seen strong equity market performance (each up between 15-24%).” 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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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.”
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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