Chinese equities are starting to catch up after underperforming the global market for two years, says Jian Shi Cortesi (pictured), fund manager of the JB Chindonesia Fund at Swiss & Global Asset Management…
From a macro perspective, recent economic figures from China have been a pleasant surprise, monetary policy has become more accommodating and moderate government stimulus in infrastructure is supporting a gradual improvement of China’s economy. On the micro side, industrial profit growth picked up in September and domestic prices of major commodities have bottomed out or started rising again. All these positive factors could lift the MSCI China Index, which is currently trading at approximately 10 times forward earnings, very low compared to its historical range.
In a recovery scenario, domestic cyclical stocks related to heavy industry and construction could perform very strongly and offer short-term trading opportunities. However, our most favoured companies remain those well positioned to profit from the long-term story of income and consumption growth in China. The new top leaders in China will take office next year, but they have already been working in important government positions for many years. They will continue to lead China on the path outlined in China’s 12th five-year plan, and their key policy focus will likely include consumption growth, environment protection, capital market reforms, and affordable housing. Key beneficiaries of these policies would likely be companies in retail, auto, consumer electronics, recreation, IT, and insurance.
However, stock selection is critical, not all companies in these areas will succeed. We focus on companies with a distinctive competitive edge, strong earnings power, a solid balance sheet and a sensible growth strategy. We recently increased our weighting in consumer stocks that meet these criteria. We expect the outlook for earnings of these companies to start improving in the first half of 2013, and see the current low stock prices as a good entry point.
