China Slowdown Won't Hurt Asian Equities, says Barings

Chinese GDP growth may have slowed but the fundamentals are still supportive of equity markets says Barings Head of Multi-Asset Khiem Do

Emma Wall 22.10.2015
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Khiem Do, Barings' Head of Asian Multi-Asset.

Hello, Khiem.

Khiem Do: Hello, Emma.

Wall: So, we're here today to talk about the recent GDP figures that came out. Some people are saying that they're better than expected. Other people are saying that it is actually quite disappointing. It's the lowest growth on record for six years. What does it really all mean?

Do: I think that they're both right actually, because if you look at the manufacturing side of the economy, actually it is getting worse. When you look at industrial production of fixed asset investments, they're still decelerating at the moment.

So the pessimists are right. But if you look at retail sales, retail sales on the services side and the consumption side, actually it looks quite good. So the optimists are right on that side and the pessimists are right on the manufacturing side. So, there has been of both.

But from our viewpoint, we think that China is definitely showing signs of slowdown, but it is still growing. It's the second largest economy in the world, which is still growing in our overview somewhere between 5% to 6% on next six to 12 months.

Wall: Of course, putting the economy aside, what investors really want to know is where the opportunities are. In the U.S. and in the U.K., we're about to have a rate rise in the next year. That's not -- and if that's so when? That means that for a lot of people they're saying there are greater opportunities in equities than bonds. Is that the same in Asia?

Do: We think so. We think that bond rates have fallen to such low levels that they're not very attractive from a fundamental viewpoint. So, let's say when you invest in the 10-year bond rate at about 1% to 2% then all you will get is 1% to 2% per annum over next few years.

But when you invest in the equities and if companies are trying to grow their earnings, overall albeit the earnings growth will be slower but they're still trying to grow their earnings.

So, we think that the equity valuation actually is a lot more attractive than bonds and not only that; we think that China is reflating, Europe is still reflating, and Japan is still reflating. So we think that all of that will be quite positive for Asian equity markets, especially when Asian equity valuations are so cheap at the moment. So, we think that definitely yes, Asian equities, we prefer to Asian bonds or even to U.S. bonds, yes.

Wall: Well, of course, having said that, the bonds do play a part in diversifying a portfolio. How do Asian bonds compare to those sort of outside of Asia in the U.S. and in the U.K.?

Do: Asian bonds, we think that will do okay, because Asian economies are slowing and Asian inflation rate is quite low. So, for most Asian economies, we think that the 10-year bond rates in Asia will continue to fall but the thing is when the rates are so low there is not a lot of gains you can have by investing in bonds.

So, definitely bonds do have a role in a multi-asset portfolio, however, relative to equities we prefer equities to bonds. But definitely, yes, we still hold some bonds as well.

Wall: So don't worry about the economy and equities are the place to be?

Do: As soon as the economies don't go into recession – don't fall in recession, we think equities are definitely the place to be.

Wall: Khiem, thank you very much.

Do: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

 

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Emma Wall  Emma Wall is Editor for Morningstar.co.uk

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