China increases imports of core commodities

Chinese imports of industrial metals such as copper, zinc, and aluminium have increased sharply in 2009. This appears to be the result of an increase in real demand, as the effects of the government's US$ 585 billion fiscal stimulus package feed through to the economy, combined with re-stocking and strategic buying to replenish state reserves.

According to Charlie Awdry, manager of Gartmore's China Opportunities Funds, there are unique reasons why China has been able to move fast to offset the negative effects of the global downturn.

"As a one party state, China has the mechanisms in place that allow it to move quickly and front-load measures to stimulate growth. We've already seen the rapid expansion of credit, now commodity demand is picking up, and next we'll start to see the results on the ground in new roads, railways and low-cost housing. The scale of spending - equivalent to almost 5% of GDP in 2009 and 2010 - has given the Chinese economy a significant boost at a difficult time. In the long term, of course, we'll also have to ask some awkward questions about productivity, and the way in which the money has been put to work."

Chris Palmer, Head of Global Emerging Markets at Gartmore, highlights that China is a high conviction idea in Gartmore's Global Emerging Markets Funds, along with commodity-exporter, Brazil. As sentiment has improved across the asset class, he has been following a barbell strategy, adding higher beta stocks to his portfolio to take advantage of improving credit markets and economic conditions, while retaining a defensive core of cash-generative companies.

"The cost of capital is still high, but falling, and leading companies are making progress restructuring debt and making their way through excess inventory. There is still a long way to go before we will see an earnings recovery, but these features suggest that some key issues that have proved a drag on performance are being addressed."