Just back from a trip to Asia, Moreno Tatangelo, Kairos senior analyst, tells us about his experiences talking directly with asset managers active on Asian markets.
What stance are managers taking to the Chinese economy?
Even historically more conservative managers have never been this constructive. According to managers, after years of disappointing performances, the market has turned bullish and could remain so for several quarters. In this initial rally, we have seen valuations normalize after years of de-ratings. In the second half of the year, we expect the economy to pickup and earnings to recover, which should lead the second half of the bull market.
What are the main factors fueling this confidence?
Fundamentally, there are four issues:
1. the Chinese central bank has joined other central banks around the world in beginning an easing process to stabilize growth and ward off deflation;
2. the Finance Minister has allowed local governments to refinance debt maturing this year in the form of bank loans and wealth management products by issuing local government bonds with long maturities;
3. the reform of government entities: the government is restructuring the main government-owned companies, with refocus on the core business of each, promoting mergers between companies active in the same sector and encouraging ownership by strategic institutional investors;
4. the deregulation of financial markets by opening the equity market further to foreign investors and internationalizing the Renminbi.
What risks lie on the horizon?
This process will include times of volatility, as we have seen in recent months. It is very likely that this volatility will be due to measures and statements by the supervisory authorities, aware of the excesses accumulating in certain areas of the market, such as small caps listed on the local market. Nevertheless, these measures have been – and will continue to be – offset by the central bank’s easing or the government’s measures. On a more structural bull market, these corrections are healthy and provide active managers with opportunities to buy.