“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. 

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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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.”

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.

The post The outlook for China appeared first on AdviserVoice.