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February 26, 2010
Aberdeen: A Bumpy Year For China In 2010
by iFAST Content Team
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2010 will be a quite bumpy year for the Chinese equity market, according to Nicholas Yeo, Head of China/HK Equities at Aberdeen International Fund Managers Limited, and the market is due for a pull-back as the market run up in 2009 was too dramatic. “It’s natural to expect a correction since the market can’t walk in a straight line. However, a short-term correction will be healthy for the stock market and it offers a lot of opportunities for long-term investors to get into the market and buy some good companies,” says Nicholas. “Asia is still presenting the best fundamentals for the moment,” he says, “and we expect to see Asia ex-Japan to grow by 7-8% in 2010. China, in particular, is leading the way thanks to the huge US$585 billion stimulus which “is paying off in terms of return to high growth”. Nicholas suggests that the valuation of China is still “reasonable” and it may be a good time for long-term investors to get their China exposure through a disciplined investment plan such as a Regular Savings Plan. iFAST: What appears to be the driving force for China’s GDP growth? Nicholas Yeo (NY): China is going to have 8.7% GDP growth in 2009, and the main driver is still government’s fiscal stimulus package, which will cause a problem in the future. Overcapacity is the key risk we will have in 2010. 21 out of 24 industrial sectors such as steel, ship building, cements are now facing over-capacity and it may take some time for these industries to work out the problem. The government has started to redrawn some of the stimulus plans from the system, which may have negative effects on the market. Usually this will trigger a correction as investors may worry that the underlying demand and exports will not be able to replace the stimulus fast enough. iFAST: Do you expect China to increase interest rates this year and how will this affect the equity market? NY: The case for credit tightening into 2010 will grow. We have seen a credit explosion in 2009 and a huge number of credit loans have been developed. The Chinese government has started to carry out some credit tightening actions at the beginning of this year. In the second half of 2010, the Chinese central bank may become even more aggressive and hike interest rate as a way to curb inflation. Having said that, the rate increase will be moderate when external demand remains sluggish. iFAST: Are we finally seeing a recovery in China’s exports? NY: China’s exporters remain hurt by the slow recovery of the West. This will be the biggest concern even though we have seen some good numbers coming through for technology companies. What we saw last year was just a rebound in export activities, partly due to the inventory restocking effect. However, the effect will fade in the second half of 2010 and whether the underlying demand from the US and other G7 countries will help to boost China’s exports is still questionable. iFAST: What kind of stocks do you like? Any examples? NY: Stock picking will gain importance this year as momentum fades. We continue to focus on defensive, cash-rich stocks, with strong franchises. At Aberdeen, we prefer to use Hong Kong as a gateway to China, which is still the safest way to approach. Hong Kong companies are more conservative and are able to survive the financial crisis. One of our core holdings is Swire Pacific, which is very well positioned to grow in Mainland China. We are buying B-shares of Swire since they tend to trade at a discount to A-shares. iFAST: Do you see a bubble forming in China’s property market? NY: The property market rebounded strongly in 2009, which actually supported China’s GDP growth (for example, 3% of Shanghai’s GDP growth came from property development last year). The flip side, however, is that some of the first-tier cities (Shanghai, Beijing and Shenzhen) are now facing speculative problems. As a result, the government has to come up with tightening measures to lessen the risk of bubble. It is too early to say if the measures are successful as they are still at an early stage. In general, we still remain cautious on Chinese property stocks. related articles Downgrade of Chinese Banks By Fitch Ratings: What’s The Impact On China’s Financial Sector China’s Faster-than-expected Recovery Leads to an Unexpected Rate Hike! |