China makes up 10% of the world economy, its GDP is growing at 8.9%. As of January 2012 its inflation rate is down to 4.5% and its economy is on course for a soft landing. And yet its share of global investment remains woefully below its true potential.
Hong Kong-based Agnes Deng, portfolio manager of Excel China Fund and head of Hong Kong China equities at Barings Asset Management (Asia), wants to change that.
One of her strongest arguments for China is valuation. Currently the market is trading at 7.8 times P/E, even lower than what it was at the height of global financial crisis in 2008.
“A lot of negatives including the turmoil in Europe, slow growth in the U.S. and the hard landing scare” have driven down valuations making them more attractive to global investors, she says.
Rising wages and the resultant spike in consumption continue to strengthen China’s position as an investment destination, she said. “Urbanization, social housing, public utilities, those have become the new driver of the fixed asset investment growth.”
One of the biggest arguments against China is its dependence on exports, which have been slipping due to recession fears in the eurozone and a sluggish U.S. economy. Deng says consumption-fuelled domestic demand, however, will largely offset export slowdown.
“In 2012, almost half of China’s GDP growth will come from domestic consumption; another 40% will come from the overall fixed asset investments, the net export [in our estimation] will contribute from zero to -1.5% of the GDP.”
Inflation, which has already rolled over from its 2011 peak, is expected to continue to fall until it bottoms out at 3% by the third quarter of this year, she added.
China has raised interest rates several times over the past couple of years to fight inflation and is now focusing on lowering them.
In another sign of monetary easing, the central bank has been lowering its reserve requirement ratio in a series of cuts, the latest being a 0.5 percentage point cut on February 24. At 20.5% it is still quite high, providing ample room for further easing, said Deng.
“Cheap valuations, early recovery in 2012, improved monetary policy and pro-growth government policies [are] pointing to higher equity market returns.”
All these factors make China attractive to investors form around the world, said Deng adding that economic overheating and a major global event may pose a risk to this outlook down the road.