Baring Asset Management (BAM) is predicting that China will re-emerge as an attractive market for investors in 2006 following the recovery of Asian markets towards the end of 2005, and as Japan, Korea and India become “overweight consensus calls.”
Khiem Do, manager of the US$42.3* Baring China Absolute Return Fund, says valuations of Japan, Korea and India became more expensive during the latter months of 2005. “As these markets have already been re-rated, we are confident that China will emerge as a more attractive option for investors in 2006 for investors looking to invest in Asian markets,” he says.
The high volatility that dominated China-related markets during September through to November 2005 has been followed by positive growth. China and North Asian markets are supported by strong fundamentals. Particularly throughout the first half of 2006, BAM believes that G7 economies will continue to grow at their long-term equilibrium rates. In line with these global markets, the Chinese economy is expected to continue to enjoy solid GDP growth.
“We expect GDP growth of between 8.5% and 9.5% during 2006, along with low inflation and interest rate levels,” says Khiem Do. “We also believe that the rising Rennin will mean the “goldilocks” economic phase is likely to continue and this means the potential for China and related markets to see positive fund inflows is strong.”
Despite the long-term fundamentals looking positive BAM believes a long-short strategy should be adopted when investing in these markets to manage the potential volatility. On the long side BAM is continuing to play long investment themes including Chinese domestic relation and Chinese consumption. Sectors and stocks where BAM is seeing positive long-term returns include consumption, port operators, and resources (gold, base metals, energy), property, banks and insurance companies.
BAM is attracted to short investments in these sectors which are susceptible to undiscounted margin erosion (such as Chinese manufacturing and utilities or telecoms) or balance sheet weakness, yet still trade on rich valuations.
Speaking of how current conditions are likely to influence the fund and its holdings over the coming months, Khiem Do concludes, “We remain optimistic on the prospects for the China-related economies and markets in the coming months. The Chinese economy continues to grow strongly with low inflation and Japan continues to recover. The Renminbi is likely to continue to be revalue in a gradual manner and as a result we are likely to adopt a net long strategy in the Fund in the coming months.
“Unless news flow is even weaker than we saw in October, we expect to maintain net exposure within a band of 50% – 75% of NAV in the short term. We would reduce the net exposure if the fundamentals were to worsen substantially and not be properly discounted by the markets”