Opportunities in China emerge as economy recovers

The positive macro data released by the Chinese authorities today underlines the strengths of China's economic management, according to Philip Ehrmann, manager of the Jupiter China Fund.

The data showed that China's economy grew sharply in the second quarter, up 7.9%. This growth, driven by the aggressive fiscal and monetary policies implemented late last year, means China is more likely to reach its 8% growth target for 2009. Furthermore, retail sales rose by 15% year on year but consumer price inflation remained under control, down 1.7% from last year.

Philip Ehrmann, manager of the Jupiter China Fund, said: "China is the first of the major economies to confirm an economic recovery. While this is undoubtedly positive and the market has jumped on the news, investors should not get carried away as this has been widely anticipated and the data is, in my view, already reflected in share prices.

"However, the data does support my view that China is one of the few parts of the world where the stimulus package put in place has been well executed and is delivering positive results. This is in stark contrast to other parts of the world. It also serves to disabuse critics of the notion that China is a nation of boom and bust economics. On the contrary, China has proved it has a firm hand on the tiller with regards to maintaining economic growth.

"My view is that the rate of fall in exports should improve from the current 26% year-on-year to 10% for the second half of 2009. Exports should then rise by around 5% in the first half of 2010. This more normal state of affairs is likely to be accompanied by the waning influence of government-sponsored fixed asset investment (FAI). FAI surged by 60% in the recent months but its growth is expected to slow to the usual level.

"Residential construction activity has recovered over the last few months as credit conditions have eased and this should offset at least half of the deceleration in government-led FAI going forward. We remain confident that the government's fiscal stimulus programme will see infrastructure and property stocks continue to outperform for the balance of the year. In addition, consumer sentiment is beginning to recover as indicated by rising consumer electronics sales and a surge in property sales volumes. This should support consumer stocks.

Ehrmann believes there are still opportunities for strong returns in Chinese equities. He said: "After showing strong performance over recent months, Chinese equities have recently paused for breath. However, while the stronger economic news is reflected in share prices, there is growing evidence that corporate results are beginning to trend higher. This appears to be prompting analysts to raise earnings forecasts almost as fast as they slashed them last year and creates opportunities for further appreciation in selected stocks.

"We continue to focus on the core elements that have driven performance over the last six months - maintaining an emphasis on funded secular growth opportunities in the infrastructure area, with a focus on overlooked mid and small cap companies. Recent additions to the portfolio include Raffles Education, an operator of vocational training schools, and Lianhua Supermarket, which announced plans to acquire Hualian Supermarket to boost its presence in the Shanghai area. We also increased our holding in Ajisen China, a noodle fastfood chain."

The Jupiter China Fund has returned 45% since its launch in October 2006, compared with 16% for the IMA Asia Pacific excluding Japan sector average. This places the Fund third out of 66 funds in the sector. During the year to date, the Fund has returned 35% compared with 16% for the sector. This places the Fund first out of 77 funds.