China domestic consumption not a bubble, say fund managers

Fund managers in the global emerging markets sector are convinced that the Chinese domestic consumption story is not a bubble, says Standard & Poor's Fund Services in its latest update on the sector available at fundsinsights.com.

Fund managers point to China's low levels of household, corporate and sovereign debt, and the timely steps the Chinese government took to tighten the economy in 2009," said S&P Fund Services lead analyst, John Monaghan.

Knut Harald Nilsson, manager of the S&P AAA rated Skagen Kin Tiki Fund, cited Chinese retail sales growth as supporting his confidence in the Chinese domestic market. "At the lowest point in March 2009 retail sales grew close to 12%," said Monaghan, "and Nilsson thinks that Chinese private consumption will continue to outgrow the developed markets and most other emerging markets."

The team at Franklin Templeton said it was impressed by the Chinese government's steps to reign in high inflation, correct the misallocation of capital and moderate the massive investment in heavy industry. "While these measures may have hurt in the short-term, the Franklin Templeton team thinks these are positive moves for long-term investors," said Monaghan.

The general view amongst fund managers is that the other BRIC economies will continue to do well. According to them, both candidates in the upcoming Brazilian presidential election - Dilma Rouseff and Jose Serra - are known quantities, and either result is unlikely to cause undue disturbance to the stock market. Managers said they were also finding opportunities in Russia, where huge discounts compared to other markets (trading P/E ratios averaging 6.5x compared to 14x for other emerging markets) were seen as more than adequate compensation for any concerns over corporate governance.

Investor appetite remains strong for emerging markets exposure. "Most of the groups we interviewed reported strong asset flows during the period," said Monaghan, pointing to Robeco, who have soft-closed their broader emerging markets strategies as well as Goldman Sachs who received new monies from both retail and institutional clients.