Will the year of the rat prove to be one of opportunity?

On February 7th the year of the Rat begins, which has in the past been noted as a year of plenty, bringing opportunity and good prospects.

Will it be a year of opportunity for investors in China? The Association of Investment Companies (AIC) has looked at the prospects for investment companies with holdings in China and Hong Kong, collating fund managers’ views on the outlook for China.

China has had a bumpy ride in the past few weeks, but investors taking a long-term view have benefited, with the average Asia-Pacific: Excluding Japan investment companyup 210% over 5 years and up 242% over 10 years. With China under the spotlight this year, and the Beijing Olympics fast approaching, what is the investment prognosis for China?

China – currently a buying opportunity?

Peter Dalgliesh, Manager of Pacific Asset Trust commented on China: “Chinese GDP growth for 2008 is expected to moderate from the lofty levels of over 11% achieved in 2007. However, despite the decline, Chinese GDP growth is still expected to be one of the fastest in the emerging world in 2008.

“The greatest difficulty that the Chinese authorities face is controlling inflation which is rumoured to have accelerated to in excess of 7% in January this year as already high food prices have been compounded by unusually severe winter weather conditions. As a result the current inflation spike is expected to peak within the first half of 2008 allowing investors to then focus on what China does best, which is grow.

“In light of this the current market sell off could once again be an opportunity to accumulate quality names with a solid growth outlook driven by structural change in an economy that is believed to be only half through its industrialisation process. Consequently China’s demand for raw materials is unlikely to decline in a significant way. Identifying sustainable themes should generate attractive returns, regardless of the economic cycle, though current concerns over policy ‘missteps’ by the authorities are significant headwinds that the market is having to contend with at the moment.”

Interestingly Peter Dalgleish believes Chinese growth will not suffer after the Beijing Olympics: “Studies have shown that investment for the 2008 Beijing Olympics by the Chinese authorities has added only a marginal contribution to GDP growth, consequently post the event it is not expected to lead to a hangover. Instead the marketing and hype surrounding the event is expected to act as a further sentiment stimulus to the already improving level of domestic consumption in the economy. With rising disposable incomes and changing lifestyles with increased recreational time, consumption plays are expected to continue to attract investor interest for the foreseeable future.”

China – is it still overvalued?

Hugh Young, Manager of a number of Aberdeen managed Asia Pacific investment companies said: “Despite a recent stock market correction at the end of 2007, and recent market volatility, we feel that Chinese stocks are still too expensive. Many companies are trading on valuations that factor in ‘blue sky’ prospects yet overlook the challenging global environment. Furthermore, while we believe corporate China has been changing for the better in many ways (overcapacity is being unwound, earnings growth has improved), it is too early to tell whether those changes are going to be widespread or entrenched. Corporate governance, the quality of management and the strength of balance sheets remain concerns. We still view Hong Kong companies as a cheaper and higher quality conduit for gaining exposure to the phenomenal, long-tem growth story the Chinese economy offers.”

Annabel Brodie-Smith, Communications Director, AIC said: “Investment companies are especially suitable for investing in specialist areas such as China as their closed-ended structure means fund managers can take a long term view of the market, without having to sell their most liquid stocks to meet redemptions.

“Investors may well be concerned about investing in the Asia Pacific region at a time when markets are particularly volatile. Regular saving is the way to take advantage of market volatility as you buy more shares when markets are low and less when markets are high. Over time regular saving smoothes out the rollercoaster of market highs and low and gives you a lower risk profile too, allowing you to sleep a bit more soundly.”