Wealth managers cast their eye over China and Asia in light of recent celebrations of a new year.
As the celebrations for the Chinese New Year begin to wind down, here is a selection of comments from wealth management houses about the next 12 months for China and the wider world.
BlackRock – Andrew Swan, managing director, head of Asian equities and portfolio manager for the BlackRock Asia and BlackRock Asia Special Situations funds
There’s been a lot of crowing ahead of the year of the rooster and while investors should listen, their prime focus ought to be on China’s improving growth signals and emerging opportunities in individual Chinese stocks. It is still too early to determine the eventual effects the new US administration will have on global trade, but we believe sanctions against Chinese imports will almost certainly be too costly for the US consumers. Making smartphones more expensive, for example, will not be popular. Other practicalities suggest high tariffs are improbable too: US businesses have spent decades assembling supply chains in China. They rely on them now, and cannot recreate them quickly domestically - or perhaps even at all. A pragmatic approach to trade with China is therefore the most likely outcome, in our view, but we will be watching this area carefully.
The question of US trade aside, the Chinese economy enters the new year looking robust. The most recent quarterly data show that trade, producer price indices, purchasing manager indices, and most high-frequency indicators like construction activity or retail sales continue to recover, highlighting an economy gaining in strength. This improvement should persist in 2017, leading to industrial profits growth and further upside in earnings. This should be underpinned by the ongoing structural reforms in China, which could indeed broaden in scope this year. In our view this will be crucial to ensuring that the economy not only keeps expanding but more importantly gains in quality, with greater reliance on domestic consumption and a more efficient domestic market and corporate environment. Ultimately, such trends will furthermore soften the impact of any trade tension that might be surfacing.
Liontrust – Mark Williams, co-manager of the Liontrust Asia Income Fund
The Liontrust Asia Income Fund had slightly over 40 per cent exposure to Hong Kong and China at the start of the year. All of this is via companies listed in Hong Kong (not A-shares, listed in the Chinese mainland markets), but they are companies with exposure to the mainland Chinese market, rather than the Hong Kong economy, which we think will struggle in a world of rising US interest rates.
This is the largest geographical weighting within the portfolio, reflecting a generally positive view on certain specific areas of the Chinese economy, but also marks a reduction from approximately 45 per cent at its peak. The reduction comes after a period of strong performance in 2016.
Much of the equity strength has reflected a confluence of positive factors in the Chinese economy. Rate cuts in 2015 took interest rates to accommodative levels which were maintained throughout 2016, which helped those with high debt burdens and benefitted areas such as property. Government spending also continued, much of it in long-term infrastructure projects, which combined with recent cuts in capacity to improve material prices. This was further aided by the US’s promise that whichever party won last year’s election would increase American infrastructure spending.
We think that Trump’s infrastructure promises will not deliver too much immediate commodity demand, however, and we also see the Chinese stimulus reducing as property tightening measures are already being implemented. This does not make us negative, but it does reduce the short-term positives. Beyond this there are two elements that have pushed us to lower exposure: ongoing high levels of bank lending - still rising at almost double GDP growth - and the renewed sharp reductions of foreign exchange reserves (averaging approximately $50 billion per month for the last quarter of 2016).
We do not see either of these as a prelude to disaster, but as we have argued for some time the failure to cut lending and ongoing large reduction in reserves does increase risks for the economy. The fund’s current positioning reflects this rising risk. Our exposure remains very selective, and does not cover the broader Chinese equity market, but we can still find plenty of companies where we think valuations look attractive, and which provide the combination of dividend yield and earnings growth that we are seeking. These tend to be in areas of domestic consumption or those with government support, which are areas we have liked for some years now.
Laura Luo, head of Hong Kong China equities at Barings
Those born under the Year of the Rooster are known for the ease with which they catch the eye and Chinese equity investors will be looking to the new US administration for direction in the coming months. President Donald Trump’s current stance suggests possible trade differences with China, but, in reality, this remains something of an unknown and we are taking a wait and see approach to his presidency. This does not change our headline view – we remain positive in our outlook for the Chinese equity market. We are, however, moving away from exporters until there is some clarity from the new US administration.
Jade Fu, investment manager at Heartwood Investment Management
Questions persist around the validity of official data releases and whether China’s economy is really as strong as the numbers suggest. Fourth quarter 2016 GDP growth came in at 6.8 per cent year-on-year, maintaining broadly the same pace as in the previous three quarters.
In our view, what is important is not the actual numbers but the unfolding trend. From this perspective, we continue to believe that China is moving forward with rebalancing its economy. Non-government data sources continue to suggest robust growth in services and consumption; online sales were particularly strong in the last two years. Moreover, household consumption as a share of GDP still remains relatively low in China - less than 40 per cent compared with 70 per cent in the US – which should leave room for longer term growth in consumer spending.
We expect China’s economy to slow moderately in the near term, as the impact of previous central bank easing and fiscal incentives fade in the first half of 2017. However, the government will be keen to continue to support the economy and maintain a stable growth trend in what will be an important political year. With leadership changes taking place at the highest level of the Communist Party in the autumn, any reforms will need to be carefully pushed forward. At December’s annual Central Economic Work Conference, which sets the policy priorities over the coming year, the key word in the subsequent communiqué was “stability”. Of course, achieving this stability is not without risk.