Shopping to bear fruit for China investors
ONCE seen as the saviour of the global economy, the markets are now having second thoughts about China, causing its stock market to fall more than 20 per cent this year.
But could this be an opportunity to buy? Valuations are looking compelling, says Doug Turnbull, fund manager of the Neptune China Income fund. Chinese stocks listed in Hong Kong are trading on 15.5 times earnings, and stocks listed on the mainland are trading at roughly 18 times. This is below both markets’ long-term average ratio, adds Turnbull.
But if it’s value you are after, then it’s worth being selective. The consumption story is a long-term theme, but some consumer stocks are trading on 25-30 times earnings. In contrast, the banking sector is looking cheap at roughly 10 times earnings. “If you believe that the China growth story remains strong, then banking stocks should be trading at a higher valuation,” Turnbull says. He likes blue-chip Chinese banks listed in Hong Kong.
But for those still enticed by the Chinese consumer, there is some good news. “We expect wage growth in China to exceed GDP growth this year,” says Ewan Markson-Brown, fund manager at Newton, the asset manager. China is on target to reach average income of $3,000 per annum, which is considered the threshold for disposable income (see chart), since it allows money to be spent on discretionary items.
Whereas a lot has been written about the luxury boom going on in China, the next stage of the consumer growth story is products that reach the 500m mass-market consumers, says Markson-Brown. “In the past the mass market bought cheap products, but now that they have some money to spend they want to buy better quality goods in nice, air-conditioned malls.” An example of a domestic brand is Belle, the largest footwear company in China. It is not exactly Jimmy Choo, but it is better than what you would find in a market.
Neptune’s Turnbull is picking consumer stocks carefully: “It’s no secret about China’s consumption story, but there are companies like Anta, the Chinese sportswear manufacturer that can carve out their own niche, and that is what we like.”
So what has performance been like for Chinese funds? In the last 12 months the Baring China Growth Fund has returned 20.2 per cent, versus its benchmark the MSCI China Gross Return Index, which rose by 22.3 per cent. Neptune’s China Fund returned 38.25 per cent from May 2009 to May 2010, outperforming the sector average of 31.35 per cent.
Although it will take decades before China rebalances its economy, a population of more than 1bn means that even small adjustments can make a difference to consumer demand.