The medium and long-term outlook for China remains positive, in spite of slowing economic growth and market volatility.
Recent market volatility is largely due to a combination of profit-taking to invest in new issues following the strong run-up in the market; and the potential for a tighter control on margin financing.
However, government measures to ease policy restrictions and expedite reforms are supportive of both the cyclical and structural growth prospects of the economy. In fact, the government indicated renewed commitment to economic growth and rebalancing the economy at the National People’s Congress held in March.
“Although the headline pace of economic expansion might slow, the emphasis on reform has increased and will, we think, have significant positive consequences for China’s economy and market, says David Kunselman, Senior Portfolio Manager with Excel Investment Counsel.
He noted that measures to improve the return on capital at state-owned enterprises while opening them up to reform to support the private sector and to encourage further financial sector liberalization will, in the long term, have a profound effect on China as it prepares for potential recognition as a market economy by the WTO in 2016. This, along with moves to improve liquidity in the market makes investment conditions highly favourable in China.
On another positive note, China and Hong Kong announced the mutual recognition of funds to allow cross-border fund sales starting in July 2015, with an initial quota of 300 billion yuan in each direction. There is also speculation of an exchange link between Hong Kong and Shenzhen to be announced soon.
Therefore, after a very strong start to the year, Kunselman thinks the recent pull-back in the market represents an attractive opportunity. He favours companies that meet three conditions. (1) they must demonstrate quality in terms of management within the business franchise, as well as the balance sheet; (2) they must have strong prospects for long-term earnings growth; and (3) there needs to be unrealized value in the share price to generate returns for investors.
He sees investment potential in several areas, including the banking sector and in companies engaged in the provision of infrastructure to support urbanization, as well as the reduction of environmental pollution. He also favours domestic consumption plays, where people are spending a little more to raise their quality of life. “These are incremental changes but cumulatively very important as average income rises, supporting spending on tourism, healthcare, and education, which continue to be significant areas of growth,” he says.
In addition, Kunselman likes companies which deliver productivity gains for businesses as well as individuals. This encompasses providers of industrial automation solutions as well as some of China’s most dynamic companies, selling into the world’s largest population.
The bottom line is that China offers significant opportunities for investors. “Our on-the-ground China managers have been able to find companies with excellent potential for long-term earnings growth in these areas and in our view, we are well positioned for our investors to benefit from the future growth and development of China’s economy and market hereon,” adds Kunselman.