Investing In China In 2016: A Viable Option Or Just Monkey Business?

Opportunities in Asia

Investing In China In 2016: A Viable Option Or Just Monkey Business?

In order to improve China's economy and strengthen their currency, many commentators have said that it is time that China stops focusing on cheap exports and turn their attention inwards.

Published on 18 March 2016

In this edition of Insider Talk, we ask the professionals about China.

Many commentators have said that in order to improve their economy and strengthen their currency it is time that China stops focusing on cheap exports and turn their attention inwards. A growth in population wealth, particularly among the middle class, means that China represents the largest consumer group in the world.  We asked a few of the top wealth managers here in Singapore to tell us what they are advising their clients.

Does the current Chinese market create investment opportunities?

Michael Foo, Chief Investment Officer & Partner, HP Wealth Management

China’s economic transformation from an investment & export-growth model to a services & consumption-driven model is already well underway. As of last year the service sectors accounted for more than 50% of GDP. Our concerns however relate more to China’s mounting debt problems. The build-up of debt since the GFC is staggering. Debt and total banking assets have reached 240% and 300% of GDP respectively. But the risk of an immediate systemic crisis remains low due to its high domestic saving, ample banking liquidity, extensive government ownership of banks and many debtors, and capital controls. In our view, the weight of debt amid the slowdown and structural reforms will be the albatross around the stock market’s neck in the coming years. That said there are opportunities in every crisis. We see opportunities in China’s new economy that is focused on technology and services to leverage on the growing affluence of its consumers.

Bryan Goh, Chief Investment Officer, Bordier & Cie 

It is feared that China’s current and future position makes it a nexus for economic and financial contagion. As manufacturing capacity is re-shored, countries like China must experience a surge in excess capacity, even if GDP does not actually shrink. In the case of China, because manufacturing was the larger contributor to output, its relative weakness translates into weakness in aggregate growth. China is full of opportunity but it has never rewarded the macro investor who buys equity index exposure, not for long anyway. Investing in China requires an understanding of business prospects, the behaviour of management and the government who continues to direct capital where it is needed and siphon it away from where it isn’t. China is a stock pickers market but fundamentals are but one small part of the analysis.

Nicholas Brinton, Senior Consultant, Aon Hewitt Wealth Management

It is very clear that China is fast becoming an increasingly accessible part of global capital markets. We advise our clients to gain broad exposure to investment opportunities and we believe that Chinese assets bring attractive diversification and return advantages to portfolios. It’s still early days in Chinese market liberalization but we expect evolution to continue to be fast and lead to China entering into global equity and bond benchmarks in the not too distant future.  We remain on the look-out for portfolio managers with strong local stock-picking abilities and expect them to take full advantage of this exciting development in global financial markets.

Rohit Bhuta, CEO, Crossinvest Wealth Management

China has gone through the entire spectrum of modern day market evolution in a relatively short period of time – from a Global force single handily holding the fort through the GFC, to becoming the world’s second largest economy, to sending ripples through the global markets causing recessionary fears.

While the market pundits have not left any stone unturned in attempting to assess China’s real growth, to possibly validate or otherwise, China’s middle class overtook the United States to become the largest in the world (approx.109 million). China remains the world’s second largest economy and is still growing faster than any other large economy (bar India).

Even if the movement in the overall population wealth and the middle class stagnates, which seems unlikely, the size and strength is large enough to effect change in consumer behaviour patterns. This represents significant growth and investment opportunities in areas such as tourism, leisure, healthcare, social media, consumption & F&B, which are all growing at an average CAGR of 11% or more.

Dominic Gamble, CEO & Co-founder,

China’s financial markets are not a good barometer of China’s economic strength not least because they are an outlet for irrational consumer investment behaviour, otherwise known as gambling (let that be a warning to all Do-It-Yourself investors).

However beyond the markets there are both positive and worrying signs. Positive in that demographic trends are supportive of growth which by the way is reportedly still strong, just not as strong as we have been accustomed to. But critics have fair reasons to back-up that China is an over-leveraged and opaque bubble waiting to burst. One thing is for sure: managing a population of over 1.3billion is extremely difficult at the best of times, not least currently when its political powers are fighting unfamiliar market forces, and increasingly fighting each other.

The days of a one way bet are far less certain and I would be extremely selective on how I invest in China. If I don’t understand the mechanics of the investment and the forces at play, I won’t touch it. That, rightly or wrongly, means that I have very little exposure but that’s a opportunity cost that I am prepared to pay.