Opportunities lie with China

Since the announcement of the RMB 4 trn ($585bn) economic stimulus package by the Chinese government in late 2008, China appears to have thus far emerged relatively unscathed from the global financial crisis, as demonstrated by robust equity-market performance and GDP growth that has far exceeded the growth in developed markets.

As we move into 2010, the question remains: Is this economic recovery and growth sustainable and, if so, what opportunities exist in the Greater China markets?

The Greater China equity markets are currently second only to the US with $5.88trn in total market capitalisation. To put this in perspective, the market capitalisation of Japan is $3.47trn, and that of the UK is $2.99trn. We believe the China equity markets will continue to grow in coming years, as a considerable number of Chinese companies that remain privately held could seek public listings.

In the past year, a relatively strong economic recovery helped drive performance for the Greater China equity markets. GDP growth during 2009 steadily increased, for an overall gain of 8.7 per cent. The 2010 GDP growth forecast for China is over four times the combined rate of expansion forecast for the US and the Eurozone. We believe this creates many investment opportunities.

Within the Greater China equity markets, we are currently focused on domestic consumption and emerging market infrastructure. While both themes may seem obvious today, they were not so evident two and a half years ago. Domestic consumption is an especially interesting theme, particularly in those sectors showing both top- and bottom-line growth. For example, the online entertainment/gaming sector may see a number of companies with meaningful revenue and profit growth over the next three to five years.

In addition to domestic consumption, we see interesting investment opportunities in emerging market infrastructure or, in other words, Chinese companies involved with businesses such as ports, highways and railways.

However, we pay more attention to companies that are equipment and service providers than actual infrastructure companies because many infrastructure companies in China remain state-owned enterprises. This means they are not always efficient, nor do they necessarily have the best management teams. In contrast, we concentrate on companies with strong fundamentals and good revenue and profit growth that provide services or supply products to infrastructure companies.

In terms of sectors, the pharmaceutical and health care sectors provide long-term investment opportunities to both international and domestic investors. We are seeing positive developments in China, as the government works towards establishing a universal health care system for the nation's 1.3 billion people.

Overall, we believe that the Greater China equity markets can continue to build on its recent strengths as China's influence grows on the world economic scene.

Frank Yao is senior portfolio manager of the Greater China equity team at Neuberger Berman. The views expressed here are his own.