Current question in the Economics Forum:
"China is aiming to change its economic growth structure from an export driven model towards a strongly domestically oriented and consumer-based approach. How realistic are these ambitions and which concrete targets could be reached within what time span? Which industry sectors will be able to benefit from China’s modified economic strategy and how should investors assess these developments from a risk perspective."
"Despite the tapering of supportive policies from central banks, in particular the US Federal Reserve, global economic growth is expected to further improve in 2014, according to fund managers at Baring Asset Management (“Barings”).
Khiem Do, Barings’ Head of Asian Multi Asset, said, “Central banks, led by the US Federal Reserve and the European Central Bank, will gradually reduce their super-easy monetary policies. This suggests that bond yields will likely continue to rise, as investors are expected to continue to re-price the relatively low real yield of government bonds, thus ultimately pushing up the level of nominal long bond rates. As far as the prospects for commodities are concerned, China’s industrial production is the key driver. Here, there still are challenging times ahead, especially as demand is predicted to grow more slowly while new supply is projected to come on-stream in 2014-2015.
Regarding China, the country’s Third Plenum of the Chinese Communist Party pledged to put forward a range of reform plans, with the aim of boosting the "decisive role” of the market in the allocation of resources in the Chinese economy, thus holding a promise of more sustainable growth in corporate earnings in the long-term. However, volatility in this market is likely to remain, as rising interest rates and a more moderate GDP growth profile could exert headwinds in the shorter-term.
According to Khiem Do, China’s equity market could be quite exciting over the next five years, and it will be driven by comprehensive reforms in the economy. Although China is facing several challenges including the well-publicized large shadow banking system, excess production capacity of low value-added products, and the internationalization of the RMB, we believe that it is time to adopt a fresh investment strategy by capturing selective stock opportunities in this market.
Looking ahead to 2014, Barings continues to expect global equities to outperform bonds and cash, based on the scenario of a modest synchronized global economic recovery unfolding in 2014-15. For China, its financial markets are likely to be boosted by several key upcoming events, including the expansion of the QFII and RQFII programs, the future inclusion of A-shares in the MSCI EM Index and the potential inclusion of the RMB in the Special Drawing Rights (SDR) with the IMF and the increasing role of the RMB as a reserve currency. The China equity market, although currently under-weighted by global investors, will be supported by attractive valuations and promise of reforms, so we expect it to continue to offer more stock selection opportunities in the small to medium-cap area, especially in the consumer, healthcare, technology, selected financials and industrials sectors."