China: keep calm and carry on

8 February 2016

‘I could escape this feeling…’ must have been on the minds of many recently as they saw China’s stock market spasms slash the value of their investments.

But, as ever with financial news, obeying your instinct carries the danger of making you part of the herd, which so often runs into calamity, inspired by nothing more than panic and short-termism.

Monday, 8 February sees the start of Chinese New Year celebrations – The Year of the Monkey. But many investors, managers and other people charged with taking care of other peoples’ money for a living are discouraging herd-mentality and urging us to take a longer view of things.

This is mainly due to the fact that it’s now seen as gospel that China is moving away from an export-based economy to one that instead looks to be focussed more on its own consumers. This transition, somehow, has caught many by surprise, who have been lulled into expecting double-digit growth figures on a yearly basis thanks to a decade of massive state investment in China’s industries.

Will China’s Year of the Red Fire Monkey bring joy to investors?

Dale Nicholls, manager of Fidelity China Special Situations, an investment trust, says: “A significant change is underway in China; it continues to grow at a better pace than the developed world and personal consumption is likely to outpace this rate of growth as the economy transitions towards a consumer-led market.

“It is interesting to witness changes driven by increasing penetration of the internet, particularly as a vehicle to reach previously untapped markets. For instance, while traditional retail networks are still to establish a rural footprint in China, e-commerce has already ensured that both goods and services are now accessible to a wider rural and middle class audience.

“As people get wealthier, demand for better quality goods and services is also on the rise in areas such as health care and education. This is creating several opportunities for the fund.”

Meanwhile, Howard Wang, manager of JPMorgan Chinese Investment Trust says: “It’s important for investors to acknowledge and be comfortable with China’s slower growth. Many secular growth opportunities with strong multi-year prospects still exist across Chinese equities, especially in the “new economy” sectors of healthcare, internet, consumption and environmental protection.”

‘Sit tight and see what happens’ 

The message very much appears to be ‘sit tight and see what happens’ as China moves from manufacturing and export to services, the economy repositioned to target its domestic population rather than those overseas.

England did the very same thing after World War 2, and with 85% of the working capital of London now working in the service sector, imagine the riches awarded to those who had seen that coming. With English being the de facto lingua franca of the world, the comparison isn’t entirely fair, but it does bear thinking about, if only because China’s staggering population figure is almost double that of Europe itself.

If these two opposing viewpoints leave you undecided, don’t think you’re the only one.

Barclays recently conducted a poll of more than 2000 investors, which revealed that 39% of its clients preferred to take a long-term approach to Chinese markets and 34% see ‘no opportunity for investing in China’. Of the remaining people, 10% fancy their chances with short-term investing and 17% are currently undecided. Clearly, the jury is still out.

‘The road ahead could be very rocky’

Of course, Confucius once said ‘Study the past, if you would divine the future.’ But then, things were a lot different then.

However, this wouldn’t be a news story without a competing viewpoint being given space, and so we move on to Jason Hollands, managing director of business development and communications with Tilney Bestinvest, who says: “China bulls point to the fact that although lower than double digit growth rates China posted in the past, GDP growth of circa 6 – 7% still way outpaces the developed world. True, but even if you believe those figures, and many economists and forecasters simply don’t, from an investors perspective, what matters is growth you can actually invest in, not GDP statistics.

“China has built up huge and potentially dangerous imbalances in its economic model which is causing widespread concern about how fragile the Chinese system really is. Indeed, China is in the midst experiencing very significant capital flight with some estimates suggesting an $800 billion exodus last year alone.

“Official policy recognises the need to rebalance the economy away from internal investment and exports, and to develop the Chinese consumer and service sectors instead… but this is a transition which is not a quick fix and will take many, many years. In the meantime the road ahead could be very rocky for some time with material risks ranging from a full blown credit crisis, the imposition of much more draconian capital controls or an aggressive devaluation in the currency.”

Is India an alternative?

Mr Holland finishes off by positing the idea that people opt for India instead, which is attracting attention for a number of reasons, one of which is its demographics, which are in direct opposition to the ageing West.

Garry White, chief investment commentator at Charles Stanley. says: “Demographics are a vital factor in a nation’s prosperity. The ‘demographic window’ is when the proportion of working-age people is at its peak. Lasting up to 40 years, it is characterised by a young workforce, a small proportion of retired people and often a fall in birth rates.

“India appears well positioned to benefit from its demographic situation. Just 6% of its population is aged over 65, with almost 30% below the age of 15. This contrasts with the UK, where almost 18% of the population are above retirement age. The Indian birth rate is slowly falling, with the average between 2006 and 2010 coming in at 21 live births per 1,000 of population and falling to 20 in the following five-year period, according to World Bank data,” he continues.

He goes on to mention a supportive government, headed by Prime Minster Narendra Modi, who recently launched the ‘Make in India’ campaign, which aims to attract both foreign and domestic investment in Indian manufacturing.

Indeed, online investment platform has seen a 280% increase in flows into India-focussed funds in 2015 compared to the year before. Stuart Dyer, Rplan’s chief investment officer, warns that “this is a very volatile asset class and investors should only have a small exposure to it as part of a balanced portfolio”.

Whatever you decide to do, at least the Year of the Monkey promises to be an interesting one.

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