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Investors look to China to drive economic growth

Asia equity funds were one of the flavours of the month in January for investors.

The latest figures from Morningstar show that the most popular retail sector for European investors was emerging market equities which saw inflows of £4.4bn in January.

Asian Pacific ex-Japan equities could not match that level of new money but Morningstar reports that the sector had its best month on record with £1.5bn of inflows in January. This compares with the £4.8bn the sector has taken in the last 12 months, inclusive of January’s record inflows.

Looking at the UK, the Investment Management Association’s latest figures show a similar trend. Global emerging market equities took £223m in January followed by £207m for European equities. Asian ex-Japan equities took £203m in January, more than double the monthly average for the previous 12 months of £80m.

With concerns over the United States’ ability to deal with its debt and nagging doubts about the eurozone, it appears that investors are once again looking to China as the engine of growth.

According to Allianz Global Investors, the country is making a real effort to boost domestic consumption and

its targeted growth rate of 7.5 per cent a year for the next decade will considerably outpace western economies. As a result it predicts that China will overtake the US to become the world’s biggest trading nation.

The uncertainty about the severity of the slowdown in China seen in 2012 was compounded by the change in leadership brought about by the meeting of the politburo in November.

But with the new leadership to be sworn in under new premier Xi Jinping this month, much of the nervousness has dissipated.

Schroders head of global and international equities Virginie Maisonneuve says: “When the Chinese leadership transition was officially set in motion in November, while we felt comfortable that the economy had troughed in Q3, there were still fears among some investors that China’s economy was heading for a hard landing. Now just weeks away from the official leadership change in March, economic data out of China have improved yet again.”

This improvement in sentiment is not just driven by changes in the political leadership in the country.

Maisonneueve says the latest economic data shows strong improvement in the strength of the Chinese economy.

She says: “On Friday 8 February, new figures showed that trade is strong with January exports up 25 per cent from a year earlier while its trade surplus stands at $29bn. Imports are also strengthening, up almost 29 per cent in the same month, which translates into a boost in demand for the rest of the world. This is very important for exporters to China, such as Germany and many countries in Asia. Inflation is being kept in check at 2 per cent and loan growth of 15 per cent year-on-year is being driven by a rebound in consumer loans.

“All of this supports the case that China’s growth is on the right track. This is important not only for investors looking for stock ideas listed in China but, more importantly, for the global economy and the source of growth China provides for many global companies world wide. This will therefore be supportive of a normalisation of the global economic environment in 2013.”

February’s celebrations of the Chinese new year saw the end of the Year of the Dragon and the start of the Year of the Snake.

Many investors will prefer not to rely on astrology when trying to pick where the best investment returns are coming from but according to Baring Asset Managers head of Honk Kong China equities Agnes Deng, the change mirrors a more stable future for the Chinese economy.

Deng says: “Looking ahead, if the Black Water Snake holds true to form, it is our belief that the behaviour of the Chinese equity market in 2013 should be more suited to many investors than the unpredictability generally experienced last year under the gaze of the dragon – a creature characterised by its dramatic and often volatile nature.

“Like the Black Water Snake, the Chinese economy can be flexible, dynamic and is hard-working as it looks to achieve superior growth supported by what we see as strong fundamentals in the consumer sector, underpinned by rising domestic demand and a growing middle class. The IMF puts the world’s second largest economy on course for GDP growth of 8.2 per cent this year and 8.5 per cent the next.”

Deng also highlights the impact of growing domestic consumption in China, saying this will be particularly beneficial for technology and telecoms businesses, while lower interest rates from the central bank will help support property prices



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