Despite the choking, pungent smog enveloping the Chinese capital of Beijing, even at the start of the chilling winter months, China is going green, officially at least. The country’s energy consumption, measured per unit of gross domestic product, has dropped by 20 per cent in the last five years, according to vice premier Li Keqiang.
And more of the same medicine has already been cooked up for the next policy-making window.
It is by listening to and forecasting these policy announcements that the increasing universe of stockpickers clustered in Asia’s financial capitals can best profit from the one of the world’s fastest growing economies, believes Louisa Lo, head of Asian equities at global fund house Schroders.
That’s why Ms Lo has confidence in stocks investing in development of new energy, one of the key innovations in the Chinese government’s 12th Five Year Plan. The key to success in Chinese investment, believes Ms Lo, is identifying a company which can benefit from such government policies and is then able to gradually move up the value ladder before exporting into other markets.
China is a policy-driven market, she says. “You need to look at government decisions and then decide which companies will benefit from them. If you follow these stories, you will do quite well, but you need to understand the government policy mindset and be selective.”
It is politically imperative for China’s government to do everything in its capacity to keep growth at higher single digit numbers as a minimum, believes Ms Lo. “Some people are expecting GDP growth to come down sharply, but this is a highly political issue,” she says.
“Below 7 per cent would not be acceptable in terms of the pain and layoffs this would create.”
With exports now falling and domestic consumption “not huge”, the emphasis will switch to new sectors such as pharma business, she says. Ms Lo also expects significant investments in China’s railway system to drive growth. Expected local government changes during 2011 should also bring more fiscal stimulation, with Schroders “not overly bearish” and still expecting growth of between 8.5 and 9 per cent.
While many regional funds tend to be organised around countries, investors should not ignore specific sectors and stocks within them, warns Wilfred Sit, chief investment officer for Asia Pacific at Mirae Asset, a fast growing Korean fund house, developing a second base in Hong Kong for cross-border investments.
Powering these sectors are distinctive themes, including the all-pervasive Asian ‘consumption’ story. This, says Mr Sit, involves the emergence of a middle income class, with China leading the way and India closely following. “We are about to enter a consumption boom in China,” he says, backed by figures from the Boston Consulting Group showing 48m middle class Chinese households in 2010 to expand to 134m by 2020.
“Like Japan in the late 1970s and 1980s, or the newly-industrialised Asian Tigers of the 1990s, China is entering that stage now.”
Following on from its exporting success and speedy infrastructure developments, China is shifting to a domestic, consumption-led economic growth, which will prevail during the forthcoming decade, says Mr Sit, favouring stocks in consumer discretionary spending sectors, such as fashion, travel and tourism.
While there is much made by Western bears of potential Asian overheating, consumption is a fairly risk-free theme, believes Mr Sit. “We are at a stage where it is not going to stop anytime soon.”
Some smaller groups run funds which are almost purely based on this theme. Coupland Cardiff Asset Management, which employs a small team of managers in Singapore, is an example. “If you are a large fund manager, you come to the conclusion that there are not enough stocks based to profit from such a theme,” believes Rory Dixon, portfolio manager of the CC Asian Evolution fund. Larger investors need big, liquid brand names such as Glaxo Smith Kline, Unilever and Nestlé, which are active in China and India.
“But in the consumer space, of 2,000 listed companies, 90 per cent of them are under $1bn market cap. That is the space we are looking at, due to the embryonic nature of the development of this sector,” he says.
“People have been talking about the Asian consumer sector for years and years, but in reality, it is very small and has only just got started.”
The beauty about the consumer sector in China is that it bypasses government policies, says Mr Dixon, so stockpickers do not constantly have to second-guess policymakers regarding regulation and political favours. In this way his selection philosophy differs fundamentally from that of a large house like Schroders.
