Managers and strategists are turning more positive on the longer-term outlook for China now the dust has settled following the historic third plenary meeting of the country’s government in December.
Last month, the ruling communist party published a lengthy document detailing a series of wide-ranging reforms aimed at opening up areas of China’s economy to increased foreign investment and tackling fears of a credit bubble.
Commentators were initially reticent to react bullishly to the reforms, but strategists have since voiced support and predicted a positive long-term outlook.
In addition, figures released early last week showed the Chinese economy grew by 7.7 per cent in the fourth quarter of 2013, down slightly from the third-quarter figure of 7.8 per cent but beating analyst expectations.
Julien Seetharamdoo, chief investment strategist at HSBC Global Asset Management, described the reforms as “encouraging” and added that a stabilisation in economic data was positive not only for China but for its neighbours, particularly Hong Kong, Korea, Taiwan and Singapore.
However, he warned that Chinese growth was “still likely to be bumpy over the next few years” as the government attempts to wean its economy off its reliance on credit to fuel growth.
This meant “risk aversion could remain high among investors for some time going into 2014”, Mr Seetharamdoo said.
Threadneedle chief investment officer Mark Burgess said the moves by the Chinese government to rein in credit growth had been a headwind for emerging markets, combined with fears of tapering and the strength of the dollar. But he added that “real value will begin to appear” across emerging markets if they can navigate their way through the withdrawal of US economic stimulus.
M&G’s emerging markets manager Matthew Vaight said the reduction of credit growth would increase the cost of capital, but argued this would “result in Chinese companies becoming more capital efficient”.
“The economic model in China is changing,” he said. “Many Chinese companies realise that having a competitive advantage based solely on cost is not a sustainable, long-term strategy.
“Chinese companies have to invest in innovation in the long term, given the growing competition from other low cost countries such as Vietnam and Thailand. In our view, to remain competitive, Chinese companies must focus on the quality of their products, brand and research and development.”
Mr Vaight runs the £528.5m M&G Asian fund and the £1.4bn M&G Global Emerging Markets fund, both of which have more than 18 per cent invested in Chinese or Hong Kong-based companies.
But Craig Botham, emerging markets economist at Schroders, said while China managed a “fairly strong end” to 2013 he forecast “weakness ahead”.
“Though exports should perform well as the global recovery plays out, the outlook for investment is bleaker than it has been for years,” he said.
“The push to tighten credit and rebalance the economy could be claiming its first victims, though we expect reformers will slow their pace if the body count climbs too high.”
The China manager’s view
Philip Ehrmann, the £188.5m Jupiter China manager, agreed that “some measures are likely to involve short-term pain” as adjustments are made to China’s credit market.
But he added: “The broad reform agenda can help unleash pent-up private sector demand for investment and consumption. What’s more, with inflation staying below the official 3.5 per cent target there is little need for tightening. We expect Beijing to keep monetary and fiscal policy unchanged next year... which should be sufficient to support real [economic growth] of 7.5 per cent.”
The manager’s holdings in logistics, pharmaceuticals and waste management firms have performed strongly recently, Mr Ehrmann said, but he has been reducing exposure to property due to the prospect of increased taxes in the sector.
The fund buyer’s view
Chelsea Financial Services managing director Darius McDermott is a little more reserved in his outlook for China.
“While the Chinese market struggled last year – along with all emerging markets – returning just 1.7 per cent, Chinese equity funds didn’t do badly at all with the average return for the calendar year hitting almost 14 per cent, but I’m not sure this will be replicated in 2014,” Mr McDermott said.
“I’m usually quite bullish on China but I’ve got mixed feelings at the moment. The horse may have already bolted in terms of short-term equity returns.”
However, Mr McDermott said he was still positive on the longer term story and tipped the Fidelity China Consumer fund, run by Raymond Ma, as a particularly strong long-term performer.
