Global barometer: analysts take their cue from China’s GDP growth figures
The headline target of 6.5 per cent per annum spurs much yes-or-no speculation and comparisons with other parts of the world
China’s figure for GDP growth has become one of the most closely watched anywhere, as it signifies not just the relative health of the national economy, but also the general state of global trade.
The headline target of 6.5 per cent per annum spurs much yes-or-no speculation and comparisons with other parts of the world. What matter most, though, are the underlying trends and finer details of sector performance, actual or perceived imbalances, and where policy initiatives are expected to have a real impact.
“For investors, the key is to understand what’s driving GDP,” says Ernest Chan, head of Asia investment management services for Morgan Stanley Private Wealth Management. “In the first quarter, it was domestic consumption and exports. So far, in the second quarter, leading indicators such as electricity and energy usage reflect that industrial production remains active and will meet continuing high demand.”
He notes China’s corporate debt to GDP ratio is on the high side, so the deleveraging of bank and corporate balance sheets is inevitable. And if domestic interest rates continue to rise, in line with global moves, it could negatively affect the local fixed-income market. In addition, the prospect of tighter fiscal policy may mitigate the short-term trend towards depreciation of the renminbi.
“The technology sector looks most attractive,” Chan says. “China’s tech companies still enjoy high earnings growth and multiples, and they have the high cash reserves and low debt levels to benefit from rising interest rates. Typically the sector is also less sensitive to political events compared with financials, industrials and consumer products.” With major projects taking shape under China’s ambitious global trade strategy, “Belt and Road Initiative”, there should also be an improved longer-term outlook for companies involved in cement, steel, iron ore and infrastructure. In such cases, though, the prime benefit could be in reducing industry overcapacity rather than generating tempting returns for investors.
“Potentially, the relaxation of capital flows, along with consistent and stable monetary policy, could help attract more international investors to move their money onshore,” Chan says. “This is something to watch closely.”
For Selina Sia, head of Greater China equity research for Credit Suisse Private Banking Asia-Pacific, forecasts of 6.5 to 6.6 per cent year-on-year GDP growth for 2017 – the present market consensus – could be on the low side. Credit Suisse had gone with a forecast of 6.8 per cent, backed up by an overweight China equities call since the end of last year and a broad recommendation that clients should focus on investing in China-related stocks in the next three to six months.
“Internet and consumer cyclicals are expected to benefit from the structural growth in demand,” Sia says. “Sectors such as construction materials and infrastructure should also gain from the government’s determination to reduce overcapacity and from projects like Xiongan, [the new city planned south of Beijing].” Fan Cheuk-wan, head of investment strategy and advisory, Asia, for HSBC Private Banking, similarly sees “pretty robust” growth momentum in China for the rest of the year. Assuming trans-Pacific tensions can be put to rest, the mainland economy looks set for a period of steady reflation.
Confirming that, the PPI (producer price index) continues to edge up; many industrial enterprises are on track for strong earnings growth; and a recovery in oil and commodity prices has driven the PPI back into positive territory since September last year.
“All this bodes well for the economy and will help valuations to expand further,” Fan says.
“For that reason, we stay positive on the earnings outlook for Chinese equities. The structural headwind of credit problems has largely been discounted by markets. So, if we look for potential risks, it is mainly the external factors and geopolitical concerns, which could have an impact on global fund flows and risk appetite. However, we would see this as a chance for investors seeking opportunities to buy on the back of the dips and uncertainties.”
Regarding specific sectors, HSBC sees continuing merit in China’s new economy stocks including IT, consumer discretionary, financial services, renewable energy, education and health care. Such counters promise to deliver enhanced earnings and better organic growth than staid state-owned enterprises and telecom firms.
“Any market pullback creates an entry opportunity into new economy stocks,” Fan says. “We pick Chinese companies after looking at their earnings growth outlook, competitive position, industry franchise, and leadership within their sectors. In other respects, the ‘Belt and Road’ initiative is going to be a long-term strategic interest, but we need to be very selective in choosing winning companies which can add value for investors.”