11th May 2015
The People’s Bank of China (PBOC) announced a 25bps cut for both China’s one-year benchmark lending rate and benchmark deposit rate, to 5.1% and 2.25%, respectively, effective Monday 11 May 2015. Suranjan Mukherjee, portfolio manager of the Fidelity Asian Special Situations Fund takes a look at what it means for investors…
From a timing perspective, I was not surprised that the PBOC announced a rate cut especially following the recent RRR cut coupled with the weak set of monetary data that we have seen released. The magnitude of the policy announcement was also in line with expectations. I think that the PBOC’s action yesterday signals their concerns over slowing growth. Overall, we need to see policy makers being ahead, not behind the curve.
The government remains committed to the longer term goal of improving the quality of growth. They have been making steady progress on a broad range of structural reforms. The State-owned Enterprises are being pushed to improve capital allocation and cash flows. The country’s capital market is opening up through schemes such as the Hong Kong and Shanghai Stock Connect (and plans to connect Shenzhen and Hong Kong) and the importance of the growth of capital markets will continue as China can’t depend solely on its traditional banking segment.
However, I am also cognisant of the fact that misallocation of capital is still rampant in some industries and bank balance sheets continue to carry unproductive assets. Further, capacity utilisation is expected to be structurally low across these sectors leading to lower pricing power as evidenced by negative PPI and deteriorating return on invested capital. This has led to some consolidation in the overcapacity sectors, but we need to see more of this to improve the structure of such industries.
The cocktail of what’s happening in these specific sectors combined with some great companies doing the right things from both a corporate governance and a capital allocation point of view, results in the perfect recipe for stock picking. It’s important to note though that while I look at the broader drivers of the economy, my investment style is very stock specific. Given this, I continue to find a number of investment opportunities from a bottom-up basis as recent monetary easing and structural reforms should help reduce their finance costs as well as improve the economic environment within which they operate.