He says: “Worldwide we have seen much more regulation and intervention in markets and you can easily adopt a ‘holier than thou’ attitude to emerging markets when a lot of western central banks have been engaged in blatant attempts to effectively bring exchange rates down.”
Datta says it is fair enough China has a desire to make its financial markets deeper and broader, but adds you “have to walk before you can run” and cannot wish for what is inherently a thin speculative market to suddenly grow up overnight.
“If you have come from a regime with a tight fix and then unleash something dramatically different people don’t know your ultimate intentions as the aspects of it were not properly communicated,” he says. “It leaves investors in the dark.”
STRONG FUNDAMENTALS
The backdrop to the Chinese equity market’s up and downs and the currency devaluation has been a slowing economy which shows no sign of picking up. In fact, the IMF’s forecast for China’s growth this year is 6.8% reducing to 6.3% for 2016 (4.2% and 4.7% for the wider emerging market and developing economies, respectively). In the year to date, the MSCI China Index has fallen by 11.8% in US dollar terms, taking it back to levels seen in mid-2014.
JLT’s Bhaduri believes almost all economic indicators in the near term point towards a slowdown and given that markets tend to be an eventual barometer of the economy, now is not the right time to get into China. He feelis investors would be better off waiting for the green shoots of recovery to appear. He does not, however, feel any reason to panic over the longer term because China has strong economic fundamentals on its side.
He adds: “The long-term story of emerging markets including China remains positive driven by strong economic fundamentals, favourable demography, ample natural resources and robust consumer demands. The sustained growth path that China has embarked on and its conscious work to stop the hard landing should positively influence its long-term prospects.”
Aon Hewitt’s Datta says in the “old China”, which grew at 12% a year, profits growth was negligible and investors lost money so there is no reason why under a new China, even though growth might settle at 5%, investors should not make money because in the turn around and rebalancing companies could recognise more value.
“China is probably in a better place now than it was five years ago in terms of potentially rewarding investors who are prepared to hang in there for some time,” he says.
IDENTIFYING WINNERS
Others, such as Charlemagne Capital’s Julian Mayo, believe it is possible to identify companies well placed to capitalise on these growth drivers over the next three to five years through stock picking opportunities.
“China is the biggest commodity consumer in the world and the price of those commodities has fallen substantially so business costs will surely fall and you should see a gradual improvement in those companies’ profits going forward,” he says. “We are underweight partly because of the composition of the market – you have this structural issue of having 70% in stateowned enterprises – but we like some companies in the paper, food, insurance and fuel distribution sectors.”
Indeed, investors with a longer-term view may feel China’s structural reform will be successful in steering it away from a hard landing and for more contrarian investors, there may be even be opportunities to carefully select stocks.
But in the near term, investors will be met with considerable volatility in China and broader emerging markets as aftershocks rumble through stock markets dragging down bond yields and commodity prices.
As JLT’s Bhaduri says: “For the five-yearplus horizon, China is the place to go, but I will not recommend any immediate shortterm investments.”
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