This is the conclusion of Skandia Investment Group’s chief investment officer, James Millard, who describes problems such as fears of a hard landing in China’s banking sector as “overblown”. He has a view of a less restrictive monetary stance leading to a “substantial” re-rating of Chinese equities.
“In China, economic data suggests that the economy is likely to avoid a hard landing despite weakness in some of its export markets. Financing conditions for some small and medium-sized businesses remain tight while the government continues to squeeze the property sector,” he said.
“With downside risk to the global economy growing and Chinese inflation likely to fall sharply, we think that the authorities could start to loosen financial conditions in some places. This could be the trigger for a material re-rating of Chinese equities, which remain unloved.”
Overall, Millard prefers emerging over developed market equities, favouring Asia and China in particular. In asset class terms he is heavily overweight investment grade bonds and has shifted some of his overweight positions in high yield into emerging market debt.
“EMD weakened substantially in September and yield levels are now attractive given the strength of sovereign balance sheets in the region. Corporate issuers of both investment grade and high yield bonds are generally in good financial health and defaults are expected to remain low next year,” Millard added.