- Further monetary easing is expected in the first half of 2012
- Chinese equities well placed relative to those in the rest of the world
- No “hard landing”: China’s growth will slow but it will remain attractive compared with the rest of the world
- Most macro risks have been priced in and the risk/reward outlook is favorable
- The next 12 months should be a defining moment for Chinese investment as investors realize the economy is not about to collapse and the tightening period is over
HONG KONG, 18 January, 2012 – The China investment team at Fidelity Worldwide Investment expects further monetary policy in 2012 driven by the need for more liquidity as money supply and economic growth soften and inflationary pressures subside.
Overall, the China team remains optimistic about Chinese equities in the year ahead with the focus on consumption and services sectors due to attractive valuations. The Chinese economy is expected to slow to around 7% to 8% in 2012 mainly due to a slowdown in exports. However, a fast growing and increasingly affluent middle class and ongoing government support will continue to boost domestic economic activity, according to Fidelity’s team of leading China investment experts - Anthony Bolton, Martha Wang, Raymond Ma and Stephen Ma at the Fidelity Team China Media Forum 2012.
Anthony Bolton, President of Investments, Fidelity Worldwide Investment:
“The next 12 months should be a defining moment for Chinese investment when investors realize 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.”
Martha Wang, Portfolio Manager for Fidelity Funds - China Focus 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 down and domestic economic activity falls. 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 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. Indeed, 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, and my portfolio is oriented towards the domestic consumption story. 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 do not have much potential to gain market share. I am 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 key 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.”
Stephen Ma, Portfolio Manager for Fidelity Funds – China Opportunities Fund:
“China is undergoing a transition from an export/investment-driven economy to a consumption/service-driven one. Although growth is expected to slow from the spectacular pace we have seen over the last 20 years, many Asian economists still expect it to range between 7% and 9% over the next few years. This growth rate is very healthy compared with the low growth expected in developed markets.
During China’s transition period, companies with weak financial and business strategies will either be taken over by stronger peers or will disappear altogether. This is something that we have been witnessing recently with weakness in some export-oriented small and medium enterprises and in over-leveraged property developers.
Supported by a meaningful adjustment in inflation, of both food and non-food items, China has commenced its easing policy, which is expected to continue in 2012. The offsetting forces of slower export growth/investments and property investment on the one hand, and faster infrastructure fixed asset investment growth and higher consumption growth driven by personal tax cuts and broad loosening policy on the other, will help stabilise manufacturing investment growth. It is also positive for China that the US is now showing signs of recovery, and that recent data shows that exports to the US are increasing and offsetting some of the decline in European-bound exports.
Looking at Greater China, we continue to see opportunities in both Taiwan and Hong Kong. President Ma’s election victory signals a closer economic relationship with China going forward, which should help overall economic growth and benefit sectors such as IT, banks, cement, consumer discretionary and staples. In Hong Kong, consumer and banking sectors are the most positive, the former because of inbound tourism from China and strong domestic consumption, and the latter because of Hong Kong’s continuing importance as an offshore capital-raising centre for China.”
Raymond Ma, Portfolio Manager for Fidelity Funds - China Consumer Fund:
“The growth of the Chinese economy will be moderate in 2012, as the negative impact from the European debt crisis and China’s tightening measures filter through. However, I believe that the risk of a hard landing in China is minimal. While the slowdown of growth in the western developed markets would hurt the outlook for export-related industries, the real impact on China’s GDP growth should be immaterial given the insignificant contribution of exports to GDP growth (~1%). Meanwhile, the growth of domestic consumption and infrastructure should remain resilient in light of a decent rise in income and continuing government support.
More importantly, the recent slowdown in inflation gives the Chinese government some room to spur growth by means of the monetary easing policy. After the surprise cut of banks’ reserve requirement ratio, the RRR is expected to be further reduced in the first half of 2012, improving the liquidity of the market.
Within equities, I believe the Chinese market should outperform their US and European counterparts in 2012 as growth will remain resilient. In particular, Chinese equities have underperformed global equities since 4Q10 as a result of tightening measures. If an easing policy starts to kick in, the Chinese market should bottom out and start to lead the market. Overall, Chinese corporates are expected to deliver top-line growth of around 15% in 2012, with consumer sectors expected to outperform as they are driven by solid domestic demand and are impacted less by external and policy factors. Stock picking will remain key – I will focus on oversold, turnaround, and sustainable growth companies.
From October 2011 onwards, China’s consumer confidence recovered quickly on expectations of easing inflation and further policy loosening. There is usually a lag of around four months before changes in the consumer confidence index are reflected in actual retail sales growth, so I expect an upward trend in retail sales growth towards the end of the first quarter of 2012. The retail sales growth rate will likely be around 15%, down from over 17% in 2011, reflecting slowing but resilient domestic consumption and GDP growth.”
Paul Tsai, China Director of Research:
“Despite concerns over China’s economic outlook, one thing that we are certain is that there is no bubble in the stock market and there are bargains out there. The ability to identify trends and regional differences through on-the-ground research becomes particularly important in times of uncertainty. With interesting regional dynamics and industry strategic direction come investment opportunities.”
Fidelity Worldwide Investment is a global leader in asset management, providing investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,000 staff in 24 countries and manages or administers client assets of US$207.9bn. It has over 7 million customer holdings and manages more than 740 equity, fixed income, property and asset allocation funds. The company’s fund managers receive research from one of the largest proprietary research teams, based in 12 countries around the world. Fidelity Worldwide Investment is an independent asset management company which is privately owned.
Data as at 30 Sept 2011
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