So far Chinese equities have been the bull market story of 2009. We recently met up with Chris Ruffle (Martin Currie) and Martin Lau (First State), two of the most respected fund managers in the sector, to find out what their views are and where they expect things to go from here.
Both managers share a similar outlook on the state of the Chinese market, Ruffle’s tone is one of caution as he is expecting a correction: Lau has a similar view, with a neutral outlook for markets and he argues that there needs to be more solid evidence of a corporate recovery in the third quarter to justify current equity prices. Essentially markets are fully priced.
Easy money
Ruffle also cautions that we may have seen the best of the easy money in China, with the risk being that the Chinese government may start to reign in their aggressive monetary stimulus designed to support its economy. His view is that a large proportion of this money has been used to invest in the stock market, property, commodity speculation and other big ticket items which could subsequently experience some weakness as the stimulus is removed.
Corporate outlook
Generally speaking, Lau and Ruffle are both finding that analysts have a much more optimistic view of companies prospects compared to management, who remain cautious. This suggests to us that analysts are focusing more on the prospect of government packages achieving their desired impact of creating sustainable economic growth, which have yet to be recognised at the corporate level.
Our opinion
We remain cautiously optimistic on the global economic outlook and maintain our preference for Asia and Emerging Markets for equity investors. Our top recommendation for Greater China equity exposure is Martin Lau’s First State Greater China. As you would expect from his comments above, the fund is relatively defensively positioned, with a preference towards companies with more sustainable growth characteristics, (e.g. consumer staples) over more cyclically orientated companies.
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