Fidelity: China recovery back on track
The fund house says yesterday’s unexpected interest rate cut is a sign that the country's government is on top of its economic problems.
By Mark Smith, Senior Reporter, FE Trustnet
Friday July 06, 2012
Falling inflation and the authorities’ willingness to boost growth bode well for China's economy, according to Fidelity’s Raymond Ma
Aside from the problems in the eurozone, a slowdown in China is seen by many as the single biggest risk to investors’ portfolios.
Recent data from the world’s second-largest economy indicates it is slowing at a faster pace than previously thought, but while Ma says the trend is discouraging, he believes swift policy action has shown that the authorities are on top of the situation.
"The second rate cut by the People’s Bank of China signals that economic figures that are due to be released next week may be worse than expected and the central government is stepping up easing to hold up growth," he commented.
Lending rates are set to be cut from 6.31 per cent to 6 per cent, while deposit rates will fall from 3.25 per cent to 3 per cent.
"This move is in tandem with my prediction at the beginning of this year: that the Year of the Dragon would be a year of liquidity and I expect more easing measures in the pipeline to boost growth."
The Chinese economy grew at an annual rate of 8.1 per cent in the first quarter, its slowest pace in almost three years.
Ma added: "One good thing is that China’s inflation is falling rapidly. CPI fell to 3 per cent in May and may continue to drop in June. This downward trend gives the central government sufficient room to take further steps to stimulate growth and investment if necessary."
"I remain confident that all these easing measures should filter through to generate an economic recovery in the coming quarters."
Ma claims that the policy action should ease the pressure in one of the most worrying areas of the Chinese economy.
"Sector-wise, lower lending rates and higher lending-rate discounts should no doubt help encourage more potential homebuyers to enter the property market," he explained.
"Historically, China’s property sector has a strong correlation with the required reserve ratio and interest rate movements and I believe this time it won't be any different."
"China’s property sector should react positively to further monetary easing this year."
Having only launched in September 2011, Ma's Fidelity China Consumer
fund is too young to pass judgment on but data from FE Analytics
suggests it is off to a good start.
Returns of 6.26 per cent over the last six months place it in the top quartile of IMA China/Greater China. By comparison, the average fund in the sector has gained 2.82 per cent over the period.
Performance of fund vs sector over 6 months
Source: FE Analytics
Ma’s fund is focused on the huge growth story in domestic consumption and he believes that as well as making it easier for Chinese people to buy their own homes, the latest policy action should also be positive for some financial sectors.
"Chinese insurance companies will benefit as well, as more people will buy insurance products given the lower deposit rates and relatively better investment returns."
"As such, I will continue to add quality property developers and insurance companies into my portfolio to leverage on the ongoing monetary easing," he said.
"On the contrary, I remain negative on banks as higher lending rate discounts represent the first step in interest rate deregulation which may result in tighter net interest margins and lower profitability."