IMF downgrades Chinese growth prospects but is the worry overdone for China investors?

29th May 2013

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A struggling global economy and weaker exports have spurred the International Monetary Fund (IMF) to slash its 2013 forecast for Chinese economic expansion writes Philip Scott.

The IMF now expects the economy, to grow by some 7.75%, down from its previous estimate of 8% for 2013. This is the latest in a series of blows undermining former growth expectations for the world’s second largest economy.

Just recently banking giant Standard Chartered lowered its predicted growth rate from 8.3% to 7.7% while Bank of America Merrill Lynch, cut its anticipated forecast from 8% to 7.6%.

In a statement, the IMF said: “Despite weak and uncertain global conditions, the Chinese economy is expected to grow at around 7.57% this year. The pace of the economy should pick up moderately in the second half of the year, as the recent credit expansion gains traction and in line with a projected mild pick-up in the global economy. Inflation is forecast to end the year at around 3%, and the external current account surplus is projected to remain broadly unchanged at around 2.5% of GDP.”

Just last week markets, including the UK’s FTSE 100 and Japan’s Nikkei tumbled following the news of a retraction in Chinese manufacturing. The flash HSBC Purchasing Manager’s index (PMI)  – a manufacturing indicator for China, fell below the 50 point level to 49.6 – marking the first fall since October last year. The US Federal Reserve also hinted at reducing its quantitative easing programme, which also diluted confidence.

But many experts feel the worry has been overdone. Gary Potter, co-head of multi-manager funds at F&C points out that as economies grow, they mature, and it becomes much more difficult to maintain such an economic acceleration. However he notes that while there is still plenty of potential left in emerging markets, from an investor’s point of view, the easy money has possibly already been made.”

Recently, speaking to Morningstar, Dr Mark Mobius, the veteran emerging markets fund manager of Franklin Templeton, commented: “Investors are concerned that China’s growth rate has slowed to 7.7%, but when was the last time, the US, Japan, Germany or the UK saw that pace of GDP growth?

“As we said more than a year ago when there were questions as to whether China was going to have a ‘soft or hard landing’, we did not think that China was going to ‘land’ at all but that it would keep on growing at a robust pace. Exports have remained resilient while domestic consumption is picking up rapidly as wages rise and disposable income increases. The Chinese government has over US$3 trillion in reserves, and thus its ability to stimulate the economy when needed cannot be questioned.”

Adrian Lowcock, of senior investment manager at fund brokers Hargreaves Lansdown agrees that bearish sentiment is more an issue of confidence as opposed to a change in fundamentals. He says at a lot of expectation has been put on China and as growth has pulled back investors have been questioning when this will bottom out.

“China’s growth figures are still very strong, well ahead of anything from the developed world but the stockmarket has not reflected this. Europe is a key factor in this, as China exports a huge amount there, its own troubles have had a knock-on impact. But the long term prospects still look good and the stocks there remains good value.”

For potential investors, Lowcock recommends the First State, Global Emerging Market Leaders fund, which is managed by Jonathan Asante. The fund is a generalist emerging markets vehicle, which has investments across a range of geographies. Alongside China, among others, it has exposure to Taiwan, Malaysia, and India.

Lowcock says: “The manager focuses on finding companies within the higher risk emerging markets region with excellent management and robust balance sheets which are trading on attractive valuations.”

For more intrepid investors, looking at a specific China portfolio, Lowcock cites the Jupiter China fund. The manager, Philip Ehrmann targets areas including environmental and automation technology, bio-technology and infrastructure construction, which are central to China’s Five Year Plan, aimed at improving social and economic development.

1 thought on “IMF downgrades Chinese growth prospects but is the worry overdone for China investors?”

  1. irontigran says:

    Enourmous admin charges of SIPP’s? No, they tend to be quite low…about 0.2 to 0.3% per year. This compares well with standard pension fund charges.

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