Editor’s note: In the first article entitled “Is China hot or overheating”, we outlined the principal risk to economic growth in China. Below, Sunny Ng summarize the insights we gathered from various leading fund managers in the region and overseas.
Christina Chung, manager of Allianz RCM China & Hong Kong
Christina Chung believes that the risk of a hard landing is not high in China. She notes that China is not burdened with external debt, has large foreign exchange reserves, a high domestic savings rate, a controlled currency and a largely closed capital account. All of these attributes indicate to her that there will be no forced currency devaluation by hedge funds or capital flight by domestic citizens, which typically drives a downward spiral during times of crisis. As for the shadow banking system she postulates that the media has exaggerated the problem. She points out that it has always existed and given that there are no reliable statistics on this market, it is difficult to conclude that it is an unmanageable and novel problem that the central government cannot handle given the country’s current financial strength. As it relates to valuations and slowing global growth she notes that “For corporate earnings, we expect there will be some deterioration given the slowdown in China’s economy and, more importantly, a sharp decline in the global economy. However, the market has discounted ahead of this earnings uncertainty. In terms of P/B (price-to-book), the Morgan Stanley Capital International China index and H-shares are already well below the 2008/2009 crisis level.”
Agnes Deng, manager of the Baring Hong Kong China Fund
Agnes Deng continues to see China as a country with great growth prospects given its strong balance sheet and rising domestic demand. While she acknowledges there are some short-term issues she believes that “the Chinese authorities have sufficient monetary and fiscal tools at their disposal to encourage growth and prevent a so-called “hard landing”. As for inflation she is confident that it will tail off given that much of it has been driven by a sharp rise in food prices due to a poor summer harvest. In her view, the recent weakness in Chinese equities represents a compelling opportunity for investors to participate in the secular growth of the region at a low entry point.
Raymond Ma, manager of Fidelity Funds China Consumer Fund
Although Raymond Ma’s outlook on the Chinese economy for the next 12 months is slightly bearish, he believe that China is in a good position to be able to withstand a global economic downturn. He points out that China is now less dependent on exports thanks to a shift towards domestic demand and the fact that half of the country’s exports are going to the Asian region or other emerging markets. Secondly, he notes that “despite the aggressive monetary tightening over the past year, economic data releases through July 2011 showed that China’s economic growth momentum remained healthy. Even with the current sequential slowness in manufacturing, China’s output is 50% above the pre-2008 crisis level and industrial production has remained at healthy mid-teen levels. Retail sales growth and wage growth have remained resilient as well.” He is also confident that government debt levels are manageable, especially in the context of their global counterparts, and is comforted by the fact that consumer debt levels continue to be very low.
Martin Lau, Director of Greater China Equities at First State Investments
Martin Lau believes that in the near-term, problems such as a possible rise in non-performing loans to local governments and continued price pressures mean that caution is warranted. Nonetheless, he remains “optimistic about the longer term domestic demand story in China, thanks to structural drivers such as the growing middle class and continued urbanization”. In terms of sectors, he notes “While the risk/reward of some cyclical stocks is looking more attractive, our preference remains for companies with more defensive characteristics such as strong cash flows and growing dividend yields.”
Philip Ehrmann, manager of the Jupiter China Fund & Jupiter China Sustainable Growth Fund
Philip Ehrmann believes that many of these threats are exaggerated, and that the market has priced in “the bleakest economic conditions” (the market is currently trading at approximately 8x forward earnings). As it relates to inflation, he points out that although current levels of inflation are high, China will likely see the rate fall back towards 3 to 4% range over the balance of the year. Food prices will fall in response to good harvests, while industrial inputs and energy prices will also trail off as overall global demand drops. As for the shadow banking system, he admits that there are still many unknowns as to the size of the market but the situation is starkly different than the credit bubble in the US and Europe: “What is not understood is there is not the same systemic risk involved, as the funds being lent out are not on geared banking balance sheets. If a group of individuals or a SOE (state owned enterprise) wish to lend their cash balances there are no new funds being created – if the money is lost, it will of course affect the “lender” and impact their own liquidity, but not see soaring non-performing loans and the need for capital infusions to protect solvency ratios.”
Desmond Tjiang, Managing Director, Portfolio Manager for Great China and Hong Kong Equity at PineBridge Investments
Desmond Tjiang is “cautiously optimistic” on the Chinese economy for 2012. Although he sees many risks and uncertainties ahead, he believes many of the concerns have already been discounted by the market. “Current market valuation at 8x forward earnings and 1.3x forward book value certainly looks appealing on longer term investment horizon. Going forward, easing inflationary pressure as well as softening economic activities would prompt the central government in fine-tuning its policies and make necessary adjustments by various degree to maintain reasonable growth for China.”
Rudolph-Riad Younes, manager of Artio International Equity and Artio International Equity II
Rudolph-Riad Younes believes that China and India have a lot of potential still because of rapid industrialization. Their potential is evidenced by the fact that there are already many globally leading companies based China and India. In contrast Russia and Brazil, are still commodities-based economies and don’t have very many global leaders outside of the resource sector.
Vincent Strauss, manager of Comgest Nouvelle Asie
Vincent Strauss maintains his long term view on China: its market where it is difficult to make money. He believes that the region favors workers more over shareholders as compared with companies in the West, and although manufacturing volumes are definitely much higher, prices are more controlled which puts pressure on margins. Having said that, he believes everything has a price and that some valuations have gone too low. He is currently adding to some of his long-term consumer plays. One area in which he remains quite negative however is the banking sector, where he notes that there is excessive debt in the context of a fairly opaque banking system. Having said that, he also recognizes that this disequilibrium could persist given the lack of freedom of capital circulation in China.
Chris Davis, manager of Davis New York Venture
Chris Davis believes that although he is uncertain about the prospects of the Chinese economy in the short-term, he is fairly confident that over the long term it will have a larger share of global GDP and continue to gain on U.S. and Europe. He does however caution that “Anybody would be crazy to think that there would not be wicked corrections from time to time.” His current focus is to take advantage of the inevitable chaos to pick up higher quality Chinese franchises that could one day emerge to be global leaders if they aren’t well on their way already. Most of his current Chinese holdings are in Hong Kong listed firms with long operating histories and owner/managers because he feels that these companies are more in his analytical wheelhouse.
Jan Ehrhardt, Managing Director at DJE Kapital AG, Pullach/Munich, and fund manager of the DJE Asian High Dividend
Jan Ehrhardt feels that although the restrictive monetary policy is hindering the economic development of China, he is optimistic about the country’s growth prospects. He worries that many small property developers are taking very high interest loans from the shadow banking system, and they could be forced to liquidate their properties at lower prices if the property market slows down. Although he does admit that the situation is not the same as the situation in the US due to the much lower mortgage loan-to-value ratios. “In general, China's growth in the last few years stemmed from financial investments. This will shift towards more domestic consumption in the future. This already is evidenced by the growth in the retail sector in China of 17.7% in September. All-in-all, I do not see any signs of stagflation down the road. Chinese stocks and shares from Hong Kong in my opinion offer, medium and long term, the greatest opportunities in Asia.” He further postulates that if the inflation rate falls below 5% in 2012, monetary policy should become expansionary again.
Grant Yun Cheng, CFA, Head of Emerging Markets, Union Investment Privatfonds GmbH
Grant Yun Cheng believes that although the recent economic data in China indicates that the economy is cooling off, he does not foresee a “hard landing”. He notes that both domestic consumption and industrial production is proving to be very resilient. On the issue of inflation, he does not believe that the policy-makers will relax their tightening stance so quickly, even though headline inflation has likely peaked due to base effect. As for the property market he does not see the bubble to bursting in China: “the underlying demand in China is still very strong for the secular urbanization trend. Overall we believe that the Chinese economy is still on a good growth path with this year’s expected GDP at 9% and next year at 8.5%. The transition to a more consumption-driven economy is underway. However, this will take time.”
Sunny Ng, CFA is Director of Fund Research with Morningstar Asia
