OVER the last few weeks we have seen the once-in-a-decade leadership transition in China, with the new President Xi Jinping surrounded by a relatively conservative standing committee.
The new president will have significant individual political power but we will need to watch closely over the next year what reforms are introduced to see the true colours of the new regime.
The final year of a ten-year political tenure tends to be one of transition with muted drive for major direction from the leadership. However, the outgoing president took the unusual step of publicly criticising the corrosive levels of corruption just before handover. Nevertheless, it is believed the new president will have a positive impact on the country and represents a new generation of pragmatic Chinese leadership.
It is expected that he will push to bring the second largest world economy into a more significant geopolitical role, more in keeping with its economic power.
The performance of funds investing in China has been disappointing - but is it time for another look?
Funds in the IMA/Greater China sector have put in a lacklustre showing with growth of 5% over five years, 4.5% over 3 years and 9.5% over one year with some funds showing losses over these same time periods. Even the great Anthony Bolton’s much lauded fund launch in China has been disappointing. However, he remains positive and stated recently: “The nature and quality of growth in China is changing. The export-driven model is being gradually superseded by a consumption driven one.
“This means GDP in the future will be lower but the quality should be higher.
“As ever, there are risks. China’s deteriorating relationship with its neighbours, especially Japan, is a worry. Friction between North and South Korea remains a possibility. However, despite these risks I continue to think that 2013 could surprise investors on the upside.”
Consumption in China is an important trend that will continue to develop over the next few decades, not just years. As GDP per capita increases (or as the Chinese people acquire more disposable income) there will be a move to services as the impact of urbanisation is more clearly witnessed.
There will be opportunities to invest in companies that will benefit from this growth both directly in the Chinese stock market but also through those global businesses that do business there but are quoted in the UK or US stock markets.
The Chinese market has suffered from foreigners having the strong belief that the Chinese economy was going to have a hard landing and as a result staying out of shares. Understanding the key trends in China will encourage more investors back into Chinese shares.
In the medium term this will be the main plank in success for equity investors. These positives include the demographic problems of an aging workforce and continued urbanisation. Sectors that might benefit in these circumstances are insurance, retail and food.
With the growth in consumerism, you could also envisage growth in the luxury goods sector. On the opposite side of the fence, as China has become the largest carbon dioxide emitter, climate change related issues may offer investment opportunities in energy efficiency, water treatment and utilities. Next year could be the time to dip your toe into the exciting investment opportunity that could be China – but don’t necessarily dive in head first.
