What does the year of the dragon have in store for investors?

23rd January 2012

Investors should hope for a better twelve months ahead than in 2011 when the year of the Rabbit disappointed China bulls. This chart shows how the market moved up in the first few months to a mid April peak before falling back more than 25% to the year end low.

Over the year of the Rabbit, shares left around 20% behind in the hutches  – although for UK investors, factors such as exchange rates and what proportion of a portfolio is held directly in China will have changed those figures – the average pure China fund fell 15.7% over the year. 

The market has moved up a few percentage points over January.

This round-up of stockbroker and fund manager views sets out the doubts with which many approach the coming year.

The view from fund manager Schroder is one of caution. The team at Schroder China Opportunities – led by manager Laura Luo – foresees "global headwinds".

It says: "This is likely to be another challenging year for the global economy. While China will not be immune to global headwinds, it is in a better position to withstand them as the government still has the scope to stimulate the economy, if necessary.

It forecasts a slow growth path with GDP down from double figures to a more modest -by emerging market standards – 7% over the next few years.  But the quality of the growth will be better as it moves from an investment-driven model to one that is more consumption-focused.

The fund's watchword for the year is "make haste slowly" with the fund moving into a defensive mode by lightening positions in financials and companies dependent on overseas demand to concentrate on services, environmental protection and other domestic sectors.

In China, the year of the Dragon has been greeted with more purchases of gold as this FT story states. China overtook India as the world's largest consumer of gold jewellery in the third quarter of 2011. The 15 day New Year holiday is now a powerful source of demand in global gold markets as traditional family gifts of cash or presents are being replaced by gold for the year of the dragon.

But while not expecting a golden return from Chinese equities, Henderson fund manager Charlie Awdry – he runs the China Opportunities Fund – is looking forward to a better year.

"Large share buybacks by companies and directors have helped a pick-up in equity values after a tough 2011 that left investors feeling battered and bruised," he says.

"Growth is slowing but inflation is falling to around 4% so the authorities have some wiggle room to boost growth to help offset the slowdown in export markets. There are pro-market reforms in oil and gas supplies which should work to the advantage of the corporate sector while the leadership change later this year may also be positive. Equities are now cheap and there has been a pick-up in trading volumes but the line ahead will be volatile, not straight."

However, some industrialists have doubts over the longer term performance of China and other emerging markets.

Frédéric Vincent, who heads Paris-based Nexans, the world's second-biggest maker of electricity cables told the Financial Times:

"There is a point of view that markets such as China and India represent an El Dorado for industrial companies, but I don't agree with this. The prospects in these places for selling high-quality products in fields such as cable were "quite limited",  due to less onerous standards of technical sophistication and lower incomes, which mean prices and profits are significantly lower than in more mature economies such as western Europe and the US."

Financial advisers who were pushing China hard a year or two ago are now more cautious.

Patrick Connolly of AWD Chase de Vere said: "It is important that investors don't get suckered into any hype regarding China and invest too heavily in the region. There is undoubtedly strong potential for stock market growth but this is likely to be coupled with huge levels of risk and volatility."


More from Mindful Money:

What are 2012's most exciting investment sectors?

Have emerging markets underperformed in 2011?

Are global corporations a safer bet than governments?

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