A BULL IN A ‘CHINA’ SHOP

Since the start of the year, we’ve been bombarded by the media on how China’s markets are bearish and that their economy is declining.

How does this impact your portfolio? Is it a cause for concern? Are the worries about the Chinese economy overblown?

Before we get swept away by the frenzy from the media, we need to assess and understand the fundamentals of China’s economy and their strategy going forward. How you perceive adversity can be a great investment opportunity.

SO WHAT CAUSED THE DROP IN CHINESE EQUITIES RECENTLY?

We feel that it was due to 2 factors, namely, a negative sentiment towards the Chinese economy and the mob mentality of retail investors.

During the last rally in China from November 2014 to June 2015, the revised GDP and PMI figures, coupled with the government’s move to reduce interest rates, was perceived to be a positive sign by retail investors. Many of these investors have little to no investment experience. The impact to the market was strongly felt when we saw the Shanghai Composite Index shoot up by about 60% in the first half of 2015. 1

The first week of January 2016 painted an opposite picture from the rally in 2015. Chinese markets were tumbling due to sentiment of a weak Chinese economy, backed by a decline in export and manufacturing data, as well as the need for the government to step in through cooling measures. Once again, this was interpreted by retail investors as negative, and their reaction can be felt through the following weeks.

GOOD NEWS FOR CHINA

One might ask, “Shouldn’t we be worried about the decline in export and manufacturing data?”

For a country that has progressed tremendously for the last many years through an economic growth model fuelled by massive exports, capital-led investments and double digit GDP growth rates, it would seem to be the case.

However, China’s strategy towards its economic growth model is, and has been changing.

The need to rebalance the economy by relying more on private enterprises and domestic consumption is recognized strongly by its leaders. This is especially so when the global financial crisis exposed flaws in a country so reliant on other nations for exports and investments.

Contrary to widespread pessimism, China is making good progress in shifting the structure of its economy to services from manufacturing. Retail sales, for example, have been growing at a double digit rate (around 14.5% year on year for 2015).2

This shift is crucial and necessary for China in becoming a world superpower. Just like a craftsman forging a fine sword, the transformation process may be dismal and even agonizing, but the results will be worth the effort. With increased domestic consumption, this new economic growth model will immeasurably sustain and improve China’s long term prospects.

In Unicorn, we continue to position our clients’ portfolio for opportunities and we remain confident of our allocation in Chinese equities. The growth prospects of its economy discussed in this article, coupled with its low asset prices, presents a good opportunity for investors to be accumulating great value for the long term.

Enjoy investing.

 

Source

1 –Google Finance https://www.google.com.sg/#q=shanghai+composite+index

2 –National Bureau of Statistics of China http://www.stats.gov.cn/English/

 

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