At a time when Western economies are just emerging from recession, China’s economy continues to expand rapidly. The country’s gross domestic product growth reached 10.7 per cent in the final quarter of 2009.
For 2009 as a whole, GDP growth came in at 8.7 per cent, exceeding both the Chinese government’s 8 per cent target for the year and the market’s expect – ations. China has achieved an outstanding economic stabilisation and the2009 GDP figures are testament to this.
Economic activity has picked up smartly as the benefits of government stimulus and easy credit have boosted consumer spending. It is worth noting that domestic consumption is making more of a contribution to economic growth than has previously been the case. Retail sales have moved higher and industrial production has made a comeback. The latest export data have also surpassed expectation, with China’s exports up
17.7 per cent in December, compared to a year earlier.
The rebound in Asian equity markets in 2009 was impressive. This was driven by a broad economic consensus that Asia was well positioned to weather any turbulence and that the region would be among the first to recover. Earnings’upgrades from Asian corporates also gave the rally additional impetus.
The rebound in Asian equity markets in 2009 was impressive. This was driven by a broad economic consensus that Asia was well positioned to weather any turbulence and that the region would be among the first to recover
China’s equity market has fallen back since the start of 2010 due to policy tightening. In China, as is the case in other parts of Asia, a form of benign monetary tightening is under way after the strong recovery of the second half of 2009. This tightening will slow the heady pace of growth andhopefully squeeze out the excesses in the construction sector.
We believe investors will want to start buying into this shortly as it will allow theseeconomies to then settle back at a steady rate of growth.
Turning to the equity market outlook, 2010 islikely to be a year when good stockpicking will be key.
In terms of our stockselection strategy, we are emphasising companies that we believe have the potential to deliver earnings ahead of expectations. An integral part of our research process is scrutinising the earnings’ outlook of each company, together with its valuation, and assessing how our view differs from that of the market.
Some low-quality stocks have been particularly strong performers in recent months, and we expect this to change. Looking ahead, we believe
earnings’ delivery will be a key differentiating factor in terms of individual stock performance.
At the time of writing the China select fund is positioned around four key investment themes, including targeting the beneficiaries of recovery of consumer confidence and continuous government policy support. In this category we are holding better quality companies with reasonable valuations in the consumer discretionary sector.
In addition, we have stocks in several insurance companies which are benefiting from stronger investment income. We have also identified a number of interesting stock-specific ideas in the technology sector.
Here, our analysis suggests our chosen companies could deliver results that beat expectation and, on this basis, they are undervalued at current levels.
Finally, the core of the fund remains invested in good quality well established companies with a high degree of earnings’ visibility which could potentially lead consolidation in their respective sectors.
William Fong is investment manager of the Baring Asset Management China select fund