The picture for Chinese corporates looks bleak – despite an interest rate cut of 0.25% and a reduction of bank’s reserve requirement ratio being implemented on 25 August, the Shanghai Composite had dropped a further 1.3% by market close.
However, Yeung, investment director at Fidelity Worldwide Investment, believes that it is not all doom and gloom, and explained that while the forward view is not ideal there are opportunities to be found in certain sectors.
“All up, consensus is bearish and should provide investment opportunities,” she said. “Even if medium-term Chinese GDP growth goes down to 5-6%, many corporates are exhibiting attractive margins and profitability.
“Rather than macro news and volatility, we are paying close attention to the micro news – what corporates are telling us in terms of future earnings and profit growth. There is a big divergence in profit growth from sector to sector.”
Yeung highlighted companies that are investing in technological advancement as likely to benefit from the Chinese government’s reform programme.
She expanded: “It is worth noting that in the overall reforms agenda and the aim of China in opening up capital markets and the current account, private sector companies are encouraged to go and buy off-shore technology know-how, other businesses and research and development. This is so that Chinese companies can climb the value chain and become innovators, versus previously being pure manufacturers.
“In addition, the reforms are going to further underpin the state-owned enterprise (SOE) market segment. Many Chinese SOEs have very attractive assets, but some need to be more efficiently managed, are we are likely to see more reforms being put in place to further the development and enhancement of these SOEs.”
Amid the gloom blanketing the macro picture, says Yeung, there are morsels of positive data coming through, which should drive Chinese property development.
“The labour and wage markets remain stable and solid, which is ultimately good for the consumer,” she said. “Also, there is likely to be further news flow in terms of the government’s five-year plan, aspects of which will be the continuation of urbanisation and driving private consumption and GDP.
“We will also need to look out for more fiscal news coming out of China in coming months, as well as continuation of the easing cycle. The easing cycle underpins the property sector, where we are seeing signs of price recovery in terms of volume and sales growth – especially in the top tier cities such as Beijing and Shanghai – which could continue.”
