China to slow but Australia still well-positioned: Tyndall AM/Nikko AM

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Economies around the world, and in particular Australia, must adapt to more moderate China growth in the future, according to John Vail, head of global strategy at Nikko AM.

Economies around the world, and in particular Australia, must adapt to more moderate China growth in the future, according to John Vail, head of global strategy at Nikko AM.

Nikko AM is one of the largest asset management companies based in Asia, and is the parent of fund manager Tyndall AM.

“While we don’t expect a hard landing in China, we do anticipate lower levels of growth over the medium term and this will impact on economic growth around the world,” Mr Vail said.

“Compared to governments and central banks in other developed countries, the Chinese government takes a long-term view on areas such as rebalancing the economy and income divisions, so there is unlikely to be a short-term ‘fix’ aimed at returning growth to the previous high levels.

“Furthermore, there are a number of potential issues that could create a further drag on Chinese growth.  These include: the shadow banking system (such as investment trusts, steel traders and completely unofficial lending); property prices in the major urban centers which are in bubble-like conditions; the banking debts of local governments and State Owned Enterprises; and the machinations of the political system.

“Anti-monopoly efforts and selective promotion of the infrastructure and property sectors will also likely continue to impact corporate profits to a significant degree.”

Mr Vail said that despite the slowdown in China, Nikko AM is still positive on global equities and commodities, albeit less so than previously.

“Even assuming a deceleration in growth, China remains the major contributor to global GDP growth,” he said.

Roger Bridges, head of fixed income at Tyndall AM, agrees that while some of the data out of China is not ideal, there is reason to believe it will achieve a soft landing.

“During the last three decades, investors became accustomed to 10 percent annual growth in China; however we have recently seen a steady slowdown in the Chinese economy, with GDP growth dropping from an annual increase of more than 12 percent in early 2010 to a 7.6 percent expansion in the second quarter this year.

“While this is a big drop, over 7 percent growth is still healthy by any standards,” he said.

Mr Bridges said that while some of the signs from China aren’t promising, he doesn’t believe that China will suffer a hard landing, although markets may well continue to be disappointed with near-term growth.

“We see a number of positives that make us believe a soft landing is more likely.

“One complaint about China is its ageing population, but although the working age population growth will be lower this decade than in the last, it remains positive, unlike in Japan and Europe.

“Another positive is that over the last month, the government has approved a spate of major investments, including 25 new urban rail projects, that could provide a lift over the rest of the year. The total cost of the projects is estimated to be about 2 percent of GDP,” Mr Bridges said.

Bob Van Munster, head of Tyndall’s intrinsic value equities team, added that the trend of urbanisation, in China as well as around the world, will work in Australia’s favour by ensuring ongoing demand for resources such as iron ore.

“Recent research suggests that close to another 3 billion people will become ‘urbanised’ by 2050, with China contributing 0.4 billion of the 3 billion and the majority of the balance provided by India, Africa and other Asian countries.

“As people move from rural areas to the city, they require accommodation, transport, hospitals etc. To build these, countries need raw materials and Australia is a primary provider of these, namely iron ore.

“There will be blips along the way, but this is typical of all cycles. We are currently in one of the tougher phases as we adjust to the changing pace of Chinese growth from an unsustainable 10 percent plus per annum to a more sustainable 7 to 8 percent per annum.  The price boom may be over, but the volume story still has a long way to run,” Mr Van Munster said.

He added that it is not just the resources sector that is adjusting to changing cycles, as there continues to be a high level of diversity across and within a number of market sectors in valuations using the ‘price to earnings’ ratio.

“Within resources there is great variation between energy stocks and mining stocks, with the latter running on exceptionally low PEs.  For example, RIO is trading on a PE of 8 times, which is incredibly cheap.

“Meanwhile defensives (which include food, healthcare, telecommunication services and utilities) are running on PEs that are much higher than most other sectors. This reflects the high level of market uncertainty, prompting investors to flock to defensive stocks that have more stable earnings. Within defensives, health care stocks are particularly expensive.

“Within consumer stocks, there is also diversity. Gaming stocks are on high PEs of around 17 times, while retail (non-food) and media stocks are running on PEs of around 10 times.

“This highlights the importance of stock selection within each sector for investors that are looking for good long-term value.  At the moment, there are a number of cheap stocks – but they face a number of headwinds, such as structural changes (media) and high Australian dollar (retail, manufacturing),” Mr Van Munster said.

Tyndall AM is a multi-specialist Australian investment manager, offering investment funds in Australian shares, Australian and international fixed interest, and alternative assets, as well as a multi-manager capability to retail and institutional investors in Australia.  It has over A$22 billion in funds under management (as at 30 June 2012).  It is a wholly owned subsidiary of Nikko Asset Management Co., Ltd., one of the largest asset manager headquartered in Asia with approximately A$165 billion in funds under management (as at 30 June 2012).


10 October 2012