Mark Konyn of RCM Asia Pacific assesses the opportunities and risks for investors in China in 2011, and explains what they should look for from their fund managers as they try to tap the market’s potential.
Date: Jan 2011
These might also mean companies which are listed in offshore markets, mainly Hong Kong, but also elsewhere in Asia, as long as they have an increasing proportion of their earnings coming from China-related activities and business.
As a result, Konyn said investors need to understand how the next Five Year Plan will ripple through the economy, change the way in which companies are focused, and generate investment opportunities.
According to Konyn, investors are worried about the prospect of higher inflation derailing growth – given that the biggest risk is the potential for a policy mis-step from the administration as it tries to ease some of the pressures caused by inflation.
The concern that investors have, he explained, is that these measures over-react or pre-empt in a way which damages some of the growth opportunities.
As a result, a number of measures need to be applied, he said, either monetary or administrative in nature, or, for instance, raising bank reserve requirements, or creating responsibilities for provisional governments to guard against rising inflation in relation to the food sector.
From a global macro perspective, Konyn said that a lot still hinges on the global economy – highlighted twice in 2010 with the sovereign wealth blow-ups in Europe. These had a significant impact on sentiment on people investing in China, he said, adding that this reinforces the connectivity between different economic regions.
When considering the renminbi (RMB), Konyn said it is important to remember that if China is running higher inflation, its real exchange rate is appreciating.
So while the focus is on the nominal exchange rate, he said China is becoming less competitive as a result of increasing prices on the mainland.
Konyn said he expects to see a number of concessions made around access to the China market, which should ease some of the pressure from a political perspective, to remove some of the heat in discussions around the RMB.
Although China’s IPO pipeline is healthy for 2011, Konyn said he expects to see the authorities be a bit more cautious in terms of supply.
At the same time, some of the other factors which dragged on the market in 2010 have worked their way through – such as the unlocking shares during the course of the year as a result of share market reforms several years earlier; some of those shares became tradeable during the year.
But there is about a 60% reduction into 2011 in terms of the amount of new supply, he said, creating the possibility that opportunities will be taken when sentiment improves, to allow more supply to come to the market.
Assessing China funds and managers
When investors are looking at which China funds to buy, Konyn said having a clear strategy is key.
When things go well, investors don’t focus on what is driving the performance, he explained. Inevitably, however, there will be times when things don’t go according to plan. At those times, he said it is important to have confidence that the overall strategy and investment thesis are still valid.
If people are buying on the back of a high beta play on the market, Konyn said they will quickly lose confidence once the market retraces some of its upward moves.
It is also important for investors to look to invest with a stable team, he added, which has experience in managing money through different market circumstances in emerging markets.