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Asian Market Overview

ASK THE EXPERT: Will China pull off 7.5% target growth rate or will reforms hold the economy back? And what are the prospects for the rest of Asia?

Holly Cook 23/07/14

Holly Cook: Welcome to the Morningstar series, Ask the Expert. I'm joined today by Catherine Yeung. She is Fidelity's Investment Director for the Asia Pacific region. 

Catherine, thanks for joining me. 

Catherine Yeung: Thanks.

Cook: So we're going to do a sort of special Asia overview as it were. We know that investors are starting to build a little bit more confidence in emerging markets, we're seeing some more assets flow back into that region, so it's a good opportunity for us to look at Asia as a whole. Let us start with China, because obviously it is filling the headlines a lot.

Now, the government is aiming to achieve 7.5% growth year-on-year, is that actually achievable given the reforms in place?

Yeung: Well, the government have been articulating that around about 7.5% is what they are trying to achieve. And it is a target. But there is a lot of chatter in Asia at the moment about whether the government is now focusing on growth at the expense of the reforms agenda - so that big reforms agenda that was announced back in November, the third plenary session.

Now, it is not as simple as that. I mean, the government, if we look at where China is, there are three key structural issues. So to begin with, we know that growth is slowing. No matter what anyone says, it's slowing.

Secondly, fixed asset investment is going to be a smaller portion of the overall growth model. And finally, whether it is President Xi Jinping or Premier Li, in fact, the entire government machine is ensuring that there will be a soft landing in China. So, investors should expect some tweaking around the edges, but a red flag for us would be a massive stimulus plan like we did see during the global financial crisis.

Cook: So the government is also putting some effort towards actually sort of making investing in the region more appealing. What specifically are they doing there and what impact is that having on investors?

Yeung: It's across the board. So, for example, we're looking at a lot more urbanisation. So that’s primarily Keqiang's pet project. We are looking at the opening up of capital markets, slowly but surely, by the way. So, for example, there's going to be a pilot programme launched in October or scheduled to be launched, which is the mutual market access game.

So, therefore, Mainland Chinese investors can buy stocks listed in Hong Kong and vice versa. Foreigners can buy certain stocks from China, which are again listed in Hong Kong. So that's very exciting. So IPO reforms, RRR cuts, particularly the agricultural sector and in particular SOE or state-owned enterprise reforms is really, really key for China.

Cook: You mentioned property there briefly. And that's obviously been filling the headlines a lot. Is the property bubble bursting?

Yeung: Well, property like in many economies is the backbone of China. And what we have seen over the first half of the year that transactions are down versus last year. But this isn't all bad news, because in a way we have an oversupply of units or apartments in China. They are underpinned there by overall demand across the nation in terms of urbanisation, so migrants moving to these cities.

So, yes, transactions are likely to come down, but not to an overall collapse. And it is quite funny; when it comes to China, there is always extreme views, the truth is always somewhere in the middle. When prices are going up, there is a bubble; when prices go down, there is going to be an absolute collapse. But transactions is something to monitor crucially over the summer period.

Cook: So, that's sort of a very brief China overview, I guess the main question is from the investor's point of view, does it still deserve to have a decent portion of your assets in a diversified portfolio?

Yeung: Definitely. When you look at China and it's make up of, let's say, MSCI World, including Hong Kong, it's certainly over 3%, yet it's the second largest economy in the world. So we do expect some kind of rebalancing. In terms of the economy, though, it's likely to muddle its way through for the rest of the year. Likely, we might have seen a bit of a trough, but investors still aren't focusing enough on these reforms.

And again, looking at the state-owned enterprise reforms, I mean this is really crucial because you have these massive companies, which are government-owned, inefficiently run some of them, but very attractive assets. And what we're seeing is the government almost wanting to create a Temasek model.

So the Temasek model is a situation we have in Singapore. Some of the largest Singapore-owned listed companies are government-owned but privately managed and that's what the Chinese are looking at sort of creating.

So, for example, Sinopec earlier this year announced that they would sell 30% of their downstream assets, all of their gasoline stations to private investors. So almost as a hybrid structure, a lot more sort of management incentive schemes going through. And again, if you have an increase in sort of efficiency with the SOE segment of the market, for many, many years, you see return on assets being a measly 5%, let's say, over the past 15 years. So if you can improve efficiency here, as well as encourage the private sector, that's all round very diverse opportunities for investors.

Cook: So that does make China sound interesting, especially for those people who might have been starting to get a little bit more pessimistic on the region. Let's look a little bit broader afield, very briefly. Are there other regions or other sectors or investment themes within Asia that you think really deserve to be on investors' radars?

Yeung: Well, regionally, over the first half we had a very exciting market in India. So the India market was out of favour last year with investors. It's been the market darling this year and for good reason, because we've seen this big elections. So Modi has now got this massive majority. He is in power for a long time.

They had their union budget last Thursday. They are saying that they are going to really focus on decreasing that fiscal deficit, to prop up growth, so take it back to around 7% to 8% from current levels of 4%. But there weren't these massive statements of we're going to do this straightaway, it's slowly but surely, which is a positive.

You've even got in the ASEAN region, again Indonesia's gone to the polls, a very similar situation to India, so looking for a strong leader there, infrastructure rollout. The Philippines, I mean that's been doing very, very well as a market. You can understand why it's expensive, but the government there has been very, very proactive in terms of infrastructure, again, attracting foreign direct investments.

And then finally, Japan, a lot of people have been quite negative this year on Japan because they are questioning Abenomics. But we really do think there are some attractive green shoots in that country, too.

Cook: Well, Catherine, thank you very much for truncating all of that knowledge into a very brief interview for us!

Yeung: Pleasure.

Cook: Thanks very much. For Morningstar, I'm Holly Cook. Thanks for watching.

 

About Author Holly Cook

Holly Cook  

is Manager, Morningstar EMEA Websites