Sunday 4 January 2009

Continued Growth Could Make Mainland Shares a Good Bet

Despite mainland share prices suffering a dramatic fall last year, it is still too early to write off their long-term investment potential.

1 comment:

Guanyu said...

Continued Growth Could Make Mainland Shares a Good Bet

Self Li
4 January 2009

Despite mainland share prices suffering a dramatic fall last year, it is still too early to write off their long-term investment potential.

Although exports will be affected by lower demand from the west this year, economic growth on the mainland will remain robust, supported by government spending and domestic demand.

The announcement of a US$586 billion stimulus package, to be spent on housing, infrastructure and post-earthquake reconstruction, and larger-than-expected reductions in interest rates show how serious Beijing is about addressing the decline in economic growth and exports.

Though the initial cause of the weakness in global equity prices came from the US, share prices on the mainland were affected as investors became increasingly concerned about the health of the banking system and the global economy.

This left them unwilling to hold assets seen as risky, even in markets that had previously performed well, such as the mainland.

According to the MSCI China Index, equities produced a total return, in US dollar terms, of 376.3 per cent in the three years from October 31, 2004, to October 31, 2007.

Since then, the mainland equity market has fallen 60.6 per cent in US dollar terms. Many investors were forced to sell assets to reduce borrowings and fund redemptions, leading to almost indiscriminate selling of mainland stocks and leaving share prices at valuations attractive relative to historic levels and other markets.

Although slower demand for exports will rein in mainland growth for some time, the economy is still expected to experience strong growth over the next few years, particularly in comparison with most developed countries. This growth is likely to be stimulated by robust domestic demand and infrastructure spending.

Based on that, it can be said that the sell-off in equity markets in the region has created an opportunity for investors prepared to take a medium-to-long-term view. However, they should be selective and be prepared for heightened volatility in the short term.

The economic transformation of the mainland is not a short-term phenomenon, but means a fundamental change in the global economic structure that should be reflected in long-term asset allocation decisions.

The sharp falls in equity prices on the mainland have left shares looking very cheap on a number of measures. The forward price-earnings multiple for the mainland, using consensus earnings forecasts, is close to the bottom of its historic range. This would imply that investors are attaching no value to the structural improvements that have been made in the mainland equity markets in terms of corporate profitability and balance-sheet strength in recent years.

Self Li is head of mutual fund sales at Baring Asset Management (Asia), a member of Hong Kong Investment Funds Association