Barings International Investment Limited ("Barings") is positive on the medium-term investment case for China. The global asset management company is particularly encouraged by government measures to ease policy and expedite reforms, which it says should be supportive of both cyclical and structural growth prospects.
In the very short term, Barings expects that the combination of profit-taking to invest in new issuance following the strong run in the market and the potential for tighter controls on margin financing may result in a continuation of recent market volatility.
However, policy initiatives which emerged from the annual meeting of the National People's Congress in March, 2015 showed renewed commitment to economic growth and the rebalancing of the economy. Although the headline pace of economic expansion might slow, the emphasis on reform has increased and will, in Baring's opinion, have significant consequences for China's economy and market.
Barings believes that reform measures to improve the return on capital at state-owned enterprises will support the private sector and encourage further financial sector liberalization which will, in the long term, have a profound effect on China as it prepares for potential recognition as a market economy by the World Trade Organization in 2016.
Baring, one of the sub-advisers of the Excel China Fund, believes that the recent pull-back in the equity market facilitates participation at a lower entry point and favors quality growth companies which meet three criteria: (1) they must demonstrate quality in terms of management, business franchise and 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.
In Barings' opinion, companies meeting these criteria are the beneficiaries of initiatives to reform and modernize state-owned enterprises and the banking sector. Investment potential also exists in companies engaged in the provision of infrastructure to support urbanization in China, as well as the reduction of environmental pollution; domestic consumption plays where people are spending a little more to raise their quality of life, including tourism, healthcare and education; and companies which deliver productivity gains for businesses as well as individuals, among them providers of industrial automation solutions and companies selling into the world's largest population.
Barings says it has found companies with excellent potential for long-term earnings growth in these areas, and believes it is well positioned for investors to participate in the future growth and development of China's economy and market.