25th January 2016
Cheap Chinese shares, on the back of the market sell-off and long term opportunity are presenting investors with a strong buying opportunity according to Baring Asset Management.
Wilfred Sit, chief investment officer for Asia at the fund manager believes that right now sentiment, as opposed to market fundamentals, is driving China market weakness.
He said: “Investors’ confidence in China has been deeply affected by issues such as the expiry of the lock-up period, concerns over the value of the Renminbi and the government’s market intervention.
“Notwithstanding, while there is no doubt that China is experiencing an economic slowdown, it does not mean that it is entering a recession. In contrast, we believe that China and other Asian markets are cheap despite the weak market sentiment.
“Investors should tap into the buy-in opportunities if the market drops. 2016 will be a challenging year but we believe there are strong entry points for investors, even more so if the market should continue to fall.”
To regain investor confidence in China in particular, more transparency and communication are required from the regulators in China, believes Sit.
He highlighted that one key, highly positive development has been the China Foreign Exchange Trade System (CFETS), which has introduced a yuan exchange rate composite index that describes the relative strength and movement of the Renminbi (RMB) against a basket of foreign currencies.
The introduction of the index provides indicators for market participants to observe exchange rate movements, and offers a more comprehensive reflection of market conditions. This, said Sit, removes the notion of maintaining the value of RMB against one single currency peg system of the US dollar, which has been used for the past 10 years during the foreign exchange reform in China.
In terms of investment opportunities, stock selection has become even more important, though. While the market has been volatile since the beginning of 2016, Sit sees strong buy-in opportunities in some companies. For example, Tencent, China’s largest and most used Internet service portal, which is one of Barings’ top investments.
Sit added: “We believe this company will continue to trade at a premium. E-commerce is a hot topic in China – the market is even bigger than the US – and we see sustainable growth potential there. Tencent has a social media business which carries enormous potential. It leverages an integrated mobile user platform in the form of WeChat, which generates commercial value.”
His other favoured companies include insurance group AIA and Airport of Thailand (AOT). In terms of the latter, Thailand is the second most popular destination for Chinese outbound tourism after Hong Kong and Macau, implying that AOT will benefit significantly from increased consumption in China as the group manages duty free business.
Sit added: “With regard to potential future US rate hikes across 2016, this is part of a normalisation process – the zero-rate policy could not be maintained forever. The impact should not affect Asian markets adversely as we anticipate the pace of the hike will be slow. Indeed, a strengthening US economy is a positive factor for Asian and Chinese exports.”