Heavy stimulus last year by the Chinese government could mean the world’s second biggest economy may be facing a much more difficult year, according to Rob Pemberton, investment director of HNW wealth manager HFM Columbus.
While last year saw double digit growth in China’s GDP and powering exports, rapid growth in money supply and credit together with rising inflation could yet see an abrupt U-turn into tightening and even an upward re-valuation of the Yuan is possible.
“China has been a tremendous success story in the last decade both in terms of economic growth and through stock-market returns to investors,” says Pemberton.
“Economically and politically it has emerged as second only to the US in global importance, and has enjoyed the positive attentions of many commentators – but perhaps a more sanguine approach to this ‘economic miracle’ is called for.
“Today’s ‘Sinophiles’ were quite possibly ‘Japanophiles’ back in 1990 – and it is not that long ago that we were lauding the economic success of Spain, Ireland and Iceland.”
Underpinning the hype is the problem that China is hugely misunderstood as an economy, he says.
“While its output numbers in terms of GDP growth, manufacturing and exports are spectacular, the country still remains poor by Western standards. China’s massive government stimulus has been dubbed the ‘Panda Put’ by some market commentators, in reference to the US Federal Reserve Bank’s one-time policy of bailing out of the financial markets – the ‘Greenspan Put’.
“The important decision for the emerging market investor is not the level of economic and corporate profit growth, but the price being paid for it. It is dangerous to equate future share price returns solely with economic or profit growth. The bulk of share price advances frequently come from multiple expansion and China is no longer cheap at 14x 2010 earnings.”
Historically emerging markets used to trade at a discount to developed markets due to their record of instability but this is no longer the case and China is now starting to feel somewhat pricey in a global market environment that is looking a lot less tolerant than last year.
When investors think of emerging market funds there is the tendency to assume that they are BRIC funds (Brazil, Russia, India, and China).
“This is a misconception as the most widely used fund benchmark is the MSCI EM Index which is weighted approximately 18 per cent China, 17 per cent Brazil but only seven per cent in India and six per cent in Russia, with the balance spread around Asia and elsewhere. There are around 12 per cent each in Korea and Taiwan as well as seven per cent in South Africa,” says Pemberton.
“For investors who want BRIC exposure rather than a pure China play, a good choice is the Allianz RCM BRIC Stars Fund which aims to have approximately 25 per cent in each of the markets. Similarly many of the Asia Pacific Funds have high Chinese weightings including two funds we recommend which have excellent long term performance records, First State Asia Pacific Leaders Fund and Fidelity SE Asia Fund.”
For investors looking to increase their exposure to the Chinese market, there are a number of funds which are pure plays on China, investing in Chinese companies listed on domestic exchanges such as Shanghai or in Hong Kong.
“For me, the ‘daddy’ of the sector remains Gartmore China Opportunities Fund. Launched back in 1983, the fund is producing returns in line with its newer, smaller rivals from Neptune, Barings, Jupiter and Threadneedle,” says Pemberton.