Having recently come back from a research trip, we believe China will deliver growth of about 7% to 7.5% in 2013, although evidence suggests the figures may be markedly weaker than this.
The prevailing mood in Beijing is that there is a great deal of hard work ahead in terms of implementing the necessary reforms to drive the economy forward, and that this will inevitably cause slower growth rates.
Although these reforms are progressing slower than the expectations of some market participants, we remain confident in Beijing’s ability to continue to pursue its agenda. Indeed, as opinion becomes more sanguine, away from the dire prognostications of the bears, the market is gradually moving away from such ‘crisis’ valuations.
It was noticeable throughout our visit that corporates are feeling more positive than the macro-commentators. While not giving especially bullish guidance, it was apparent that companies are feeling much more comfortable as policy has become less tight recently, despite the broad domestic demand picture remaining relatively weak.
However, we believe investing in China will be increasingly a search for alpha rather than beta. We no longer expect China to be a high beta play on global growth, with the focus instead increasingly to be centred on individual sectors and companies.
This is because the process of reform and the incumbent slower economic growth environment will see an increased division between companies well placed to benefit from this or to adapt successfully to it, and those which are not.
While we still see plenty of excellent structural growth stories in China, as well as operationally excellent and competitive companies that are able to benefit from the ample levels of absolute growth available, the key to investing in China will be successfully picking out these companies.
The industries likely to prosper most within this environment include gas, healthcare, travel, technology and constructors. Noticeably, too, property companies remain remarkably confident in their outlook, noting that government policy is not designed to cause price falls and is sufficiently well telegraphed so that volume-based developers can continue to prosper.
