China stocks face worrying questions in the next few months, in economics and politics, in China and overseas. But William Fong, investment director at Barings Asset Management, said investors shouldn’t go overboard in their worries.
“Being cautious, not defensive or negative – that’s the right way to look at the market,” he said.
Not the Fong downplays the problems. He noted that the current reporting season in Hong Kong has mostly been a discouraging parade lower profits and losses, the product of plunging exports and sagging manufacturing in the first half of the year.
On Thursday the string of weak corporate results helped push Hong Kong’s Hang Seng Index down 1.2% to 19,553, below its 200-day moving average. The index of Chinese companies shed 1.4% to 9,341.
Another looming problem is an uptick in inflation. China’s tight money policies last year helped bring inflation down to the 2% level in July, and Fong told Equities this gives Beijing some room to re-stimulate the economy. But he pointed to a recent uptick in volatile vegetable and meat prices as a warning that inflation may emerge again as a problem.
On the other hand, according to Fong, there are some plusses in the market. A big one is valuation. Stocks prices have held up surprisingly well despite the current run of poor earnings results and downgrades, he said.
“This is a strong indication that the market has priced-in a lot of negatives, and valuations are attractive.”
Maybe the biggest potential positive is a new round of easier monetary policy by major banks. It will take a concerted push by Europe, the U.S. and China to push global markets substantially higher, Fong said.
As for China, the upcoming change in leadership set for this autumn will delay introduction of fundamental new policies. Fong doesn’t see major shifts until early next year.
Meanwhile, he said, we are In a “period of monitoring. After we confirm improvement in the economy, the index will go up in the medium term.”
Confirmation requires several months of several months of improvement in key Chinese economic measures, such as fixed asset investment, PMI, industrial output and retail sales.
Before that happens, commodity producers may have the roughest times, said Fong, who is the investment manager of the Barings China Select Fund. But investors could find some opportunities. Technology and export stocks may get a boost from new products, he said. The introduction of Windows 8 and a new iPhone should spur demand In the fourth quarter. End
Hong Kong Blue Chips: -236, -1.2%, to 19,553, 08-30-12, Hang Seng Index
Chinese Stocks in Hong Kong: -130, -1.1%, to 9,341, 08-30-12, HSCE Index
Shanghai Stocks: -0.1, -0.003% to 2,053, 08-30-12, Shanghai Composite Index.
Chinese Stocks in the U.S.: -1.7, 364.7, 08-29-12, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong opened sharply lower under the weight of a run of weak corporate results and ended below the 200-day moving average. Giant bank ICBC (FXI) slumped 1.8% ahead of release of results on Friday. KGI Research
Quotable: Regional Strategy – China : Slowing in nominal but stabilizing in real. Overweight equity for the long term.
“External demand continues to weigh as export growth grew only 1.0% y-y in July. Overall though, we speculate that the real economy might be stabilizing.” Phillip Securities. 8-29-12
Chinese Company to Watch: Agricultural Bank of China ( “Since operating figures was discouraging, ABC’s share price is expected to face pressure.” KGI Research. 8-29-12
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN