There was little talk among managers of a hard landing in China. Samantha Ho and the team at Invesco believe there is little chance of this occurring. Their view is that the tightening cycle is over but that any significant loosening of monetary policy is unlikely in the short term.
The vast majority of managers interviewed share a similar view on monetary policy: they feel that any relaxation at this point would add to inflationary pressures. Ho’s view is further supported by the fact that China’s central government is reluctant to make any moves before it sees a clear picture on how the European Union member states manage the ongoing debt crisis.
Change of leadership
Policy issues are further clouded by leadership changes in China during Q3 2012, with the presidential and premiership inaugurations taking place in March 2013. Although it is widely anticipated that President Hu Jintao will be replaced by Xi Jingping and Premier Wen Jiabao by Li Keqiang, seven other Politburo members are also due to retire leaving the Populists competing with the Elitists for greater influence.
Charlie Awdry at Henderson feels that government policy will be unclear in the period leading up to these changes and that the reform path will be uncertain under the new leaders until new central government policy has been established.
At review, the big four state banks (Bank of China, ICBC, China Construction Bank, and Agricultural Bank of China) were typically held underweight or avoided completely by Asia managers – positioning that had proved to be successful in terms of relative performance.
One notable exception was Jing Ning at BlackRock who maintained an overweight to banks throughout 2011 as she is unconcerned by the potential issues concerning non-performing loans. That said, with valuations at historical lows and therefore becoming attractive to those managers with a value-tilt to their investment approach, early moves were seen from Fidelity’s Joseph Tse and Allan Liu – managers of the group’s Asia Special Situations and South East Asia funds, respectively.
Cong Li at Mirae also sees value within the banks and added positions at year-end.
Although he maintains the view that it is difficult to see these stocks outperforming the market over the next two to three years, he is convinced current valuations represent a short-term opportunity. Kim Lee at Canada Life also felt Chinese banks were cheap and offered opportunities and began adding to them in recent months.
Key trends
- Inflation in China and India remains a concern;
- China is unlikely to loosen monetary policy in the short term;
- China’s “big four” state banks are typically underweight or avoided completely, although some managers see short-term opportunities;
- Domestic consumption remains a strong theme across the region but is currently being played through less obvious means.
