Download Fidelity Commentary-China Views by Martha Wang_Oct

10 October
2012
Commentary
Is China’s golden age of growth over?
By Martha Wang, Portfolio Manager of the Fidelity Funds-China
Focus Fund
Chinas growth has slowed down recently. Are China’s golden years of growth over?
In the near-term, the economic cycle will be influenced by the policy cycle.
Over the medium-term, with export growth likely to continue to trend down, the Chinese economy is likely to slow
to high single-digit growth (from double-digit growth of the last 10-years). Over the past few quarters China’s
economy growth has been below trend, given that the reversal of tightening policies only started in late last year.
Therefore it will take some time to show on the economy.
However, I believe the worst period has passed, as the full impact from previous tightening policies impacted the
economy in the second half of last year. China has cut interest rate twice over the last two months. Given easing
inflationary pressure, there is room for further loosening to help revive the economy.
The significance of the rate cut this time around is the widening floating range around benchmark rate. This is an
important move towards interest rate deregulation, which facilitates modernisation of China’s financial system in
the long term.
Which factors threaten the outlook for China?
There are primarily two factors. One factor is the macro policy. Looking forward we should continue to see
further policy easing, along with structural reforms to address China’s growth sustainability issue. In the shortterm, there may be some uncertainties in policy timing, given the fact that the government leadership transition is
scheduled in the second half of this year.
The other factor is corporate earnings. There have been earnings cuts over in the past 12 months. We may be
close to earnings trough in the near term given that leading indicators like cashflows are improving, and input
costs are softening. Nevertheless, over the medium-term, corporates need to face the challenges to adjust their
growth model given the change in the economy growth pattern.
Having said all this, I think the stock market has priced in most of the risks. There are few periods in the history
of China when the market has been as cheap as this.
In Q2, the Chinese stock market performed worse than Q1 due to doubts over sustainability of economic
recovery in US and high growth in China. In addition, uncertainty over the eurozone crisis and its implications for
demand for Asian products and trade financing unnerved investors.
Stocks regained some lost ground towards the end of Q2 as eurozone leaders agreed to relax conditions for
recapitalising banks and the Chinese government announced an interest rate cut and a subsidy scheme.
Expectations of further policy easing in China also supported markets.
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At the sector level, cyclical industrials, energy, consumer discretionary and materials stocks ended lower as the
growth outlook deteriorated and commodity prices declined. Utilities were the only sector to generate positive
returns. Manufacturing activity in China slipped to a seven month low in June, while exports remained
surprisingly resilient.
Which sectors interest you?
I have pursued investment opportunities from three key secular dynamics in China.
1 - China’s consumption potential, especially opportunities from people’s lifestyle change.
2 - China’s industrial upgrading and industry consolidation.
3 - China’s economic dynamics is spreading from coastal to inland regions.
That is why I am always keen on sectors like consumer and information technology.
I am also interested in quality industrial and cyclicals, which are trading at trough valuations.
Currently, I am cautious on the export sector, especially on companies that do not have the potential to gain
market share.
Meanwhile, stocks in the consumption sector are likely to offer attractive investment opportunities.
I generally favour companies with good growth prospects, strong execution capability and reasonable valuations.
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