InvestmentsAug 20 2014

Barclays: China fears being overplayed

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The reduction of “apocalyptic fears” about the Chinese economy means pro-risk investors should consider upping their exposure, according to Barclays Wealth and Investment Management’s multi-asset team.

Head of equity strategy William Hobbs said that while there was “much to worry about” in some respects, such as public sector debt, exposure to emerging Asian equities would be good for some investors.

“Some of the more apocalyptic fears regarding the Chinese economy have begun to fade in the past couple of months, prompting a sharp bounce in the country’s equity markets,” he said. “For some time, we have felt policymakers in China have had both the means and the will to avert economic catastrophe and this has proved true so far.”

Since May, the MSCI China index has risen 15.1 per cent in dollar terms, according to FE Analytics, while the broader MSCI Emerging Markets index is up roughly 6.2 per cent.

Mr Hobbs added there had been a “marginally more upbeat tone to recent business confidence readings” as well as some “tentative signs” of stabilisation in the property market.

“For some time, our tactical preference has tended towards the more developed charms of those stocks quoted in Taiwan and Korea,” he said. “However, for those clients with a firmer constitution, able to look beyond the near term, Chinese equities may make an interesting addition to their emerging market mix.”

Mr Hobbs said only Spain and Ireland had grown their debt levels as quickly as China in the past five years. This, coupled with a slowdown in growth, had prompted fears about the world’s second-largest economy. The decision to allow credit to grow, but at a “marginally lower trajectory”, had bought its leaders time to develop “an ambitious reform agenda”, he added.

“Allowing credit to continue growing faster than economic output in the short term is essentially buying the authorities time to enact the necessary reforms to [state-owned enterprises and local government],” he said. “For local government, the likely protracted birth of a municipal bond market may serve the dual purpose of bringing funding back on balance sheet as well as forcing a greater degree of transparency and governance.

“For the state-owned enterprises, there are a number of measures. Last month, trials of a mixed ownership structure were announced, again perhaps helping to force greater accountability and enhanced corporate governance.”