No hard landing in China, says Threadneedle’s Chan
The manager of the China Opportunities fund says China’s move towards a more domestically focussed economy should off-set a slowdown in exports.
By Mark Smith, Senior reporter
Saturday August 04, 2012
The slowdown in China represents a move towards growth at a sustainable level rather than a sign of structural weakness, according to Threadneedle’s Gigi Chan
The manager of the £56.8m Threadneedle China Opportunities
fund says that a significant economic downturn in the developed world is slowing demand for Chinese products and that the world’s second largest economy is moving to a more focus on domestic consumption.
“Economic growth is undoubtedly slowing but we believe it is simply moving to a more sustainable level as China makes the transition from an investment and export-led economy to a more balanced model in which domestic demand is the key driver of growth,” she explained.
“At present, consumption accounts for just 30 per cent of GDP in China, whereas in developed countries, such as the US and the UK, it accounts for between 60 per cent and 70 per cent of economic activity.”
Growth in China, often referred to as the world’s factory, has slowed to 7.6 per cent in the second quarter. Economists are concerned because the West relies on China to support its ailing economies.
China bulls like Chan, however, are convinced that growth in less developed parts of the economy should compensate for the dip and in the associated stocks plenty to cheer about.
“Following a prolonged period of underperformance versus global markets, Chinese equities are trading at compelling valuations,” she said. “We believe that there are a number of sectors and companies in Greater China with strong earnings growth and reasonable valuations.”
Unsurprisingly, we favour businesses exposed to domestic consumption, we also like companies that generate strong cash flows, as well as those with their own franchises and that have proprietary technology or are moving up the value chain,” added Chan.
“We also like some of the Chinese internet companies such as Baidu and Tencent. The valuations of Chinese internet players have declined sharply, while earnings continue to grow at a fairly rapid pace.”
As the eurozone crisis continues to weigh on Western markets, the fund manager believes China can remain somewhat immune from the malaise and therefore offer strength on a comparative basis.
“For while the eurozone is the country’s largest trading partner, China’s trade with the developed world (as a proportion of its total trade) has been decreasing,” she continued. “At the same time, trade with the fast-developing economies of Asia, Latin America and Africa is increasingly significantly.”
“China and other emerging economies in Asia are arguably built on much more solid foundations than many of the developed economies. Europe, for example, is home to heavily-indebted governments, highly-leveraged companies, and debt-laden consumers. By contrast, Asia is characterised by governments, companies and consumers with very healthy balance sheets.”
Data from FE Analytics shows that the Threadneedle China Opportunities fund has marginally outperformed the average fund in the sector since it was launched in March 2007 with a return of 45.47 per cent.
Performance of funds versus sector since March 2007
Source: FE Analytics
The five crown First State Greater China Growth
managed by FE Alpha Manager Martin Lau
has, by comparison, returned 91.3 per cent in that period with lower volatility.