Economic prospects for China are substantially better than currently priced into the market, says Agnes Deng, investment manager of the Hong Kong China Fund at Barings Asset Management.
China ETFs: Recent weakness may represent strong opportunity, says Barings' Agnes Deng.
In terms of valuations, Deng believes that the recent weakness in Chinese equities represents an attractive opportunity for investors to participate in a multi-year growth story at a low entry level.
“With share price valuations at the lower end of historical ranges in both Hong Kong and China A-Share markets, we maintain that the economic prospects for China are substantially stronger than currently priced into the market and we will continue to view periods of market weakness as potential buying opportunities.
“We believe that inflation and policy risk has started to moderate in China, while the government’s pro-growth policies should make smaller and medium-sized companies, particularly the latter, deserving of renewed interest going into 2012.”
Recently, the People’s Bank of China cut the bank reserve requirement ratio by 50 basis points, the first reduction since December 2008. Deng believes this move has the potential to encourage banks to lend additional money and should provide strong support to economic growth.
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“In our view, this is also evidence that the Chinese Central Bank feels sufficiently comfortable with the outlook for inflation that it can begin to loosen China’s tight monetary policy.”
As inflationary pressures gradually ease, and as confidence returns to equity markets, Deng believes that earnings growth will once again become the principal driver of Chinese equities.
“We maintain our core view that while we acknowledge that there are risks, we believe the market is being too pessimistic. China is a dynamic economy with enormous potential for transformation, with the International Monetary Fund forecasting economic growth to come in at 9.0% in 2012, more than double the predicted global growth rate of 4.0%.”
In particular, Deng likes industrial companies, internet stocks and companies in the consumer sector.
For UK-based investors wishing to gain exposure to Chinese equities, there are a number of ETFs to choose from, tracking a range of different Chinese equity indices.
iShares FTSE China 25 ETF
DB X-tracker FTSE China 25 ETF
EasyETF FTSE China 25
The FTSE China 25 Index measures the exposure to the 25 largest and most liquid Chinese stocks (Red Chips and H shares) listed and trading on the Hong Kong stock exchange.
Source MSCI China ETF
HSBC MSCI China ETF
DB X-tracker MSCI China Index ETF
The MSCI China Index measures the performance of the top 85% of equities by market capitalisation in the Chinese equity markets.
Lyxor ETF China Enterprise
The Hang Seng China Enterprises Index (HSCEI) consists of companies registered in the People’s Republic of China and listing on the Hong Kong Stock Exchange.
PowerShares FTSE RAFI Hong Kong China ETF
The FTSE RAFI Hong Kong China Index is designed to track the performance of the largest Hong Kong companies on the FTSE RAFI Hong Kong China Index based on the following four fundamental measures of firm size: book value, income, sales and dividends.
CS ETF (IE) on CSI 300
DB X-tracker CSI 300 Index ETF
The CSI 300 Index measures the performance of 300 stocks traded on the Shanghai and Shenzhen stock exchanges.
CS ETF (IE) on MSCI EM Asia
Amundi ETF MSCI EM Asia
SPDR MSCI EM Asia ETF
The MSCI EM Asia Index measures the equity market performance of approximately 8 emerging markets in Asia. As of 30/11/2011 China had a weighting of 29.22% (Taiwan accounted for an additional 18.21%).