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Market Review : The Challenges and Opportunities in China

This month's commentary focuses on China, which was in the news for a variety of reasons in October. Guardian Trust Funds Management managing director Anthony Quirk gives his views on the state of the markets.

Tuesday, November 4th 2003, 2:41PM

by Anthony Quirk

This market summary is provided by Guardian Trust Funds Management. To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Review here

The immediate issue globally on China is whether its currency, which is currently pegged to the US dollar, is likely to be revalued. The US administration is certainly pushing for this but to date seems to have gained little traction on this issue with the Chinese authorities. China is enjoying an export boom at present, partly due to favourable exchange rate movements.

Locally, China was in the headlines with the visit of the Chinese President, Hu Jintao, who met with our Prime Minister during late October. China is already New Zealand's fourth biggest trading partner which made the talks on a free trade agreement crucial. It was pleasing to see some progress in this regard, including enhanced trade protocols for our meat exports to China.

Of course China has the world's largest population and has been one of the world's fastest growing economies for a decade. This is expected to continue with some forecasters suggesting it will triple in size over the next 20 years!

Given this it was interesting to see how our global equity manager, Capital International (Capital) views China in terms of the investment opportunities it provides. The following is a brief summary of some of their views.

The decade long economic growth in China has been dominated by infrastructure investments such as ports and roadways. For example, it spent almost NZ$1 trillion in 2002, equivalent to 42% of China's GDP.

At the same time multinationals have moved manufacturing facilities to China. Component suppliers, equipment manufacturers and wholesale buyers have followed them, completing the manufacturing supply chain and making China a virtual "factory of the world". Helping this is China's educated and reasonably priced labour force.

This rapid growth has led to some imbalances in the domestic economy but a combination of government policies and the country's high savings rate should mean a "soft" landing may be able to be engineered. However, whatever the short-term outlook for the economy, the long-term secular growth story for China remains largely intact.

Capital notes that investing in China directly is a "challenge" since the domestic economy is dominated by state owned enterprises (SOEs) and until recently the domestic stock market has been closed to foreign institutional investors. However, there are various ways to access China's strong growth, including:-

  • domestic Chinese companies
  • Hong Kong's H-share and "red-chip" market
  • Hong Kong consumer companies
  • Asian companies targeting the Chinese retail market
  • multi-nationals using China as a manufacturing base
  • Taiwan-listed technology companies that have moved production to China
  • global commodity producers exporting to resource-constrained China
  • Western and Japanese equipment manufacturers
  • luxury retailers who benefit from Chinese tourists to Hong Kong.

Clearly the skill and expertise that Capital provides is in establishing the best options to access China, after taking into account Capital's strict investment criteria and well established investment process. It is interesting to note that other than resource companies such as BHP Billiton, Australasian companies would not feature on that list. In fact, most companies from New Zealand and Australia have struggled to make good profits in China, despite the huge opportunities in that country.

Thus accessing China through a global investment manager remains the best bet for most investors. It is likely to become an increasingly important part of global portfolios given Capital suggests that China's role in the global economy continues to grow exponentially, reminiscent of the rapid pace of industrialisation in post-war Japan.

In terms of the market numbers for October the New Zealand equity market continued to shine while bonds struggled. The NZSX50 Index was up 1.1% for the month and is up over 15% for the past year. Small companies have done even better with the NZSX Small Cap Index up 4.8% for the month and 28% for the past twelve months.

Overseas equity markets were strongly up for the month with the NASDAQ rising 8.1% and the main US equity index, the S&P 500, up 5.5%. This is the best month for these markets since April. For the past year the numbers are even better with the NASDAQ up 45% and the S&P up 19%.

Japan continues to price in a recovery with its sharemarket being up 10.4% for the quarter on the back of improved business sentiment and activity levels.

On the bond side, in New Zealand the CSFB Government Bond Index was down 0.9% for the month and is down 0.5% for the past three months. Global bonds did slightly better, with the Lehman Index down 0.6% for the month but up 1.8% for the quarter.

On the currency side US dollar weakness continued with the kiwi appreciating 3.5% against it for the month. Thus, the US continues to preside over a weaker dollar policy. This accentuates the issue of China's increasing global competitiveness and export penetration into developed countries, given it remains pegged to the US dollar.

To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Reveiw here

Anthony Quirk is the managing director of Guardian Trust Funds Management

Anthony Quirk is the managing director of Guardian Trust Funds Management.

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