It may be the ‘Year of the Dog’ for China, but for investors looking to avoid the bite of market falls and economic turmoil – is the Asian nation a good bet for 2018?
After steadily opening up to the rest of the world in the 90s, China boomed and outstripped the West to become one of the world’s fastest growing economies.
While this pace has slowed over recent years, it still managed to secure economic growth of 6.9 per cent in 2017.
China has long been tipped as one of the countries to watch and saw its economy grow 6.9 per cent in 2017
To put this in context it is a lot less than the 9 to 10 per cent it enjoyed between 2008 and 2011, but still well above anything seen in European or North American countries, which typically see around 2 to 3 per cent growth a year when their economies are on a decent footing.
Consumer spending is up, with retail sales in China 9.4 per cent higher in 2017 than the year before, and the middle classes have an increasing amount of spare cash and an appetite to spend it – savings in the country are notoriously low.
Mark Taylor, chief customer officer at online trading website Selftrade, said: ‘Since the last Year of the Dog in 2006 the economy has seen a dip, rapid rebound and a gradual downward drift. ‘Having stated.that, the Chinese stock market had a strong year in 2017.’
The long-term outlook suggests there are still huge opportunities to be found in the country despite issues around government and corporate debt, Taylor added.
It will almost inevitably be a more volatile year for China, but will likely avoid a full downturn, as veteran emerging markets investor Gary Greenberg of Hermes Investment Management says.
He expects 2018 will be another solid year of growth even if the country does show signs of slowing – something Greenberg puts down to the economy maturing.
‘As the Chinese economy slows in 2018, pressure on interest rates will probably moderate and we can expect another good performance especially from higher quality businesses.
Chinese President Xi Jinping: Government debt to GDP stands at 46 per cent, but corporate debt – where many firms are backed by the government – is far higher at 165 per cent of GDP
‘Every dog has its day, but China has had a good several decades…2018 should be yet another year when the dog of financial collapse doesn’t bark and the market makes further progress,’ Greenberg said.
Debt levels in the country are, however, a major reason to be wary.
While government debt to GDP appears fine at 46 per cent, corporate debt is far higher at 165 per cent of GDP and many companies are backed by government cash.
Personal household debt has risen over the past five years and the rate of borrowing has grown faster than GDP and is now 25 per cent above the long-term trend.
Architas investment director Adrian Lowcock points to the rise of domestic loans as a big area for concern. Rates of these loans has risen form 5 per cent in 2012 to 28 per cent in 2017.
Consumer spending in China soared in 2017 – up 9.4 per cent higher than a year previously
‘Investors considering China should tread with caution. The economic outlook at present is supported by synchronised global growth which is a significant tailwind for a country still largely dependent on exports,’ Lowcock says.
‘Whilst GDP growth is much stronger than in developed markets investors should remember it rarely correlates with the stock market performance. And if the country doesn’t bring its debt issues under control then the risk of a hard landing could return.’
While caution should be aired, many remain optimistic that Chinese markets should perform well if investors are prepared to weather out some bumps along the way.
Josh Crabb, head of Asian equities at Old Mutual Global Investors, stated.the recent stock market correction had thrown up appealing ‘underdog opportunities’ with economic fundamentals still sound.
‘Constituents of the Chinese banks sector have started to bounce from double-digit falls, while selected beneficiaries of the so-called fourth industrial revolution – the internet of things, artificial intelligence and 3D sensing – have once more attracted buyers in the Asian region.
Happy New Year: China is celebrating the Year of the Dog in 2018
He stated.looking for companies with solid earnings forecasts and asset backing should be top of the list.
‘Those investors who thought they had missed the rally in Asian equities at the start of the year, would do well to pick up some bargains,’ he said.
‘Investments related to the rise of China’s middle-class consumer remain a core focus for me,’ added Fidelity’s Dale Nicholls, who manages an investment trust which consists of Chinese stocks.
For those not wanting to pick out individual stocks and target only China but want some exposure to it, a product that tracks the performance of emerging markets could be an option.
Taylor suggests an emerging markets ETF such as the Vanguard FTSE EM tracker which would offer exposure to more liquid Chinese stocks and remove some of the risk of investing in one country.
Investing in the broader emerging markets, with some exposure to China, is also the tip from Adrian Lowcock who urges investors to remain diversified.
‘The country is now a leader in various industries and the rate of innovation is impressive, which should help create some exciting investment opportunities.
‘However, the country is still an emerging market and there is the potential for some bumps along the way as we saw in 2015 and 2016.
‘As such investors should consider a diversified approach to China. This gives investors greater flexibility as managers can move to where the best opportunities exist within emerging markets.’