As China’s growth rates splutter, the debates rage on about its future economic prospects. The bears are predicting a long-anticipated collapse while others feel that a softer and more manageable scenario will be played out. Institutions could sit on the sidelines but for the shrewd investor, this is the optimal time to look for those undervalued companies with strong sustainable growth and robust underlying fundamentals.
“The question is how many countries are producing real GDP rates of 7% and the answer is none, except China.”
Frank Yao
It is easy though to understand why investors are skittish. The economic data has been worse than anticipated with growth sliding to a three-year low of near 7.6% from a peak of 11.9% in the first quarter of 2010 while industrial production, a key measure of manufacturing activity, dropped to 9.2% in July from 9.5% in June. Exacerbating the situation was the HSBC Markit China manufacturing PMI – measurement of factory output – which was just revised downwards to 47.6 in August from 47.8 – a sizeable fall itself from July’s final reading of 49.3.
Not surprisingly, stock markets took a hammering. The end of August saw the Shanghai Composite Index suffer its eighth loss in 10 weeks, plunging to a 52-week low. In the past nine months, it has slumped by 20% and surrendered around two thirds of its value since late 2007. As a result, stocks look much cheaper, commanding just 9.5 times 2012 profits – versus 13.8 times for US shares and 11.4 times for European stocks, according to Deutsche Bank’s Asia strategists.
Other Asian countries which have also been hit by waning exports and slackening consumer spending, are faring better. For example price/earnings multiples are pushing 14.7 times in India, 14.2 times in Indonesia, 15 in both Malaysia and Taiwan, and 17 in the Philippines. In fact, South Korea is the only other major Asian market fetching less than 10 times earnings 2012 profits.
Putting it in perspective
Although disappointing, market participants do believe investors need to put the figures into perspective. As Schroders head of emerging market equities Allan Conway puts it, China may be growing more slowly but no economy can maintain 10% infinitum. As a country develops, growth slows but the rates in China even at 7%+ are much better than the US which is expected to be 2%+ this year and Europe which is in recession.”
Schroders has recently marginally reduced its 2012 GDP forecast for China to 7.8% down from 7.9% but believes that a turning point will occur in the third quarter despite weakness of the July data. “We do not see sub 7% mainly because the government does not want to see the economy slowdown to that extent,” says Conway. “It is well understood that growth is the government’s number one priority in order to minimise unrest and to ensure there is ongoing stability.”
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