We wish all WealthBriefingAsia subscribers a healthy and prosperous Year of The Horse.

In the same way as the approach of 1 January brings out the investment soothsayers, so the start of the Chinese New Year at the end of this week has prompted a slew of predictions, particularly at what has been a nervous period in Asian and emerging markets.

Consider some numbers. China, now the world’s second largest economy, has hit headwinds. According to Crédit Agricole Suisse, the Asian country’s GDP is slated to grow by 7.6 per cent this year, down from 2013 and some firms expect the rate to abate in future. The MSCI China Index was more or less flat last year in terms or returns, although over five years, total returns were 9.11 per cent (capital growth plus reinvested dividends). And as chronicled by this and other publications, the run-up to the New Year date of 31 January had investors in China fretting that a wealth management product could default, although in this specific case, a rescue by ICBC prevented this part of China’s “shadow banking” system from setting a nasty precedent. (See this story here.) Above all, the Asia-Pacific region, while it remains enormously varied - a point investors forget at their peril - hasn’t escaped the impact of a prospective winding down of US Federal Reserve money printing. In Hong and Singapore, both jurisdictions have achieved some measure of success in curbing red-hot property markets; Hong Kong is vulnerable to Fed policy as the Hong Kong dollar is pegged to the greenback.

So with such background noise, some private banks and fund managers are looking for positives. Andrew Swan, who manages the BlackRock Asia Fund, argued that the recent package of promised structural reforms to China’s Communist-run country, announced late last year, boded well - at least in the longer term.

“Leading up to Chinese New Year, there have been a raft of announcements from Beijing, many of which could be hugely transformative and open China to reform and new sources of private sector-led growth,” he said.

“In the alternative energy space, both wind and solar power look interesting given the steps being taken to address China’s well-publicised pollution problems. These sectors are already benefiting from momentum behind reform, and should enjoy the greater usage of wind power by the electricity grid and a reduction in excess capacity in the solar industry. Interestingly, pollution is also making the simple task of going out shopping more challenging, which will be to the benefit of online retailers,” he continued.

“November’s detailed reform announcements show real ambition, and from a longer term perspective, are clearly positive and could prompt a significant re-rating of valuations in China. In 2014, there will be hurdles to overcome with yet to happen tapering and challenges presented by the Chinese banking sector, but this under owned asset class is likely to show increased returns as the macro environment stabilises,” he said, adding: “Upturn in global growth, structural reform in India and further QE in Japan, combined with attractive valuations, could mean that the Asian horse will push its nose in front of other equity markets by year end, before sprinting off into the years ahead.”

Gold
Will it be a happier New Year for gold? After the mauling gold prices received last year – falling by the sharpest extent since the early 1980s, around 30 per cent, investors in the metal are licking their wounds and hoping for some respite. Adrian Ash, head of research, BullionVault, the physical precious metals market for private investors, argues the gold market could benefit if and when Chinese policymakers give people more freedom to hold assets, and widen ways to trade in the metal. China has been, along with countries such as India, a traditionally voracious buyer of the yellow metal.

“Chinese New Year is a key event for the global gold market, rivalling Diwali in India as a peak in consumer demand. The world's number 1 gold miner since 2007, China is now the number 1 private gold buyer thanks to the 2013 collapse of legal Indian imports following New Delhi's attack on the trade deficit. But with the world's second-largest economy buying gold hand over fist, why did gold just deliver its worst annual price drop in three decades?” he said.

“Last year saw the biggest movement of gold by value in history, as Western selling was snapped up by Asian buyers. Exchange-traded gold trusts previously used by European and US fund managers to escape the financial crisis shed more than 800 tonnes of metal. China's net gold imports through Hong Kong matched and beat that by one-third. Chinese jewellery demand rose to new records, overtaking India by a fat margin and rising at the fastest pace in 20 years. Over the last decade, China's private gold demand has now risen 15 times in Yuan terms, far outpacing the four-fold growth in its GDP” Ash said.

“The blunt lesson of 2013 is that such consumer demand doesn't move gold prices. People who buy gold because it is gold tend to want more when prices fall, and vice versa. The people who count are instead those who buy gold because it isn't anything else. That means investors with a broader choice of assets to reject, and with discretionary funds to keep buying as prices rise,” he said.

He said that recent public statements from senior officials at the People's Bank of China have put the gold market at the heart of China's broader financial reforms and that the authorities are opening up the domestic gold market to foreign players, reportedly granting import licenses to overseas banks for the first time just this month.

RMB place to be
Geoffrey Hunt, director and senior product specialist for Asian fixed income, HSBC Global Asset Management, said the Renminbi is supported by the underlying economy but also by a clearly stated desire by the Chinese government to let the currency appreciate steadily.

“2013 saw the usual lurid headlines forecasting impending economic doom for China in various guises. Investors should expect exactly the same in 2014 as the outcome is perhaps even more uncertain in the light of a nascent recovery in developed economies and a seeming determination on the part of the Chinese authorities to cool credit growth in the world’s second largest economy. Nevertheless, the offshore RMB market in US dollar terms returned nearly 7 per cent, one of the best outcomes for any bond market anywhere. Where does this apparent disconnect come from?” he asked.

He said one reason is that general commentary and media reporting on the country is “biased”, saying that negative headlines make for more arresting copy. “This phenomenon may be particularly acute when it comes to China because it is a subject which is difficult to understand given the country’s significant differences in language, culture and economic system to many other parts of the world. In a similar vein, commentators may be guilty of judging China by western standards. In this way, they may sometimes forget that the Chinese government still holds a firm grip on the levers of the economy which most governments have long since relinquished,” said Hunt.

A second reason for the difference between commentary and reality is that the RMB market is heavily skewed towards financial issuance, with the majority of it done by the big four Chinese banks or large global banks, each of which has strong “fundamentals”, he said.

“These metrics are broadly the same as we move into 2014 as they were at the beginning of 2013 (in fact both the yield and the duration of the whole market are slightly higher). This suggests to us that the prospects for this market remain good, that the risks are skewed in the investors favour, and that although returns are unlikely to be spectacular, there is a good chance that they will once again be stable and resilient. Even if some of the well-publicised risks around the China story begin to crystallise, investors should be protected by the mathematics and the structure of the market,” Hunt added.

Editor's note: By the way, according to reports, the lunar new year that starts on 31 January, contains, according to a Reuters report, a "great deal of fire, bringing energy, and also wood, fuelling the flames, and making them stronger". I have no idea how this equates to shareholder returns, however.