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‘Views from the Bund’ is a monthly publication that gives clients a value-added view on China macro, strategy, and industry insights.
• Key investment theme: We stay cautious on MSCI China in the coming
months, despite a possible technical rebound because: (1) we see downside
earnings risk to MSCI China due to the economic deceleration owing to the
combined ripple effect of the crackdown on the property sector and a
slowdown in banks’ lending to local government-funded investment
projects; (2) policy risks such as the resource tax, which may hurt the
earnings of and de-rate multiples of energy and upstream resources
companies; (3) tight liquidity situation in China, as reflected in the recent
rise in short-term interest rate in the repo market as well as inter-bank
market; and (4) possible additional tightening measures in property and FAI
areas such as raising share capital funds requirement for investment projects,
and property tax on tier-one cities on a pilot basis, etc. That said, we firmly
believe in China’s bright medium-term growth prospects because: (1) China
boasts of a strong balance sheet at the country, household, and consumer
levels. Total government debt is still below 50% of GDP, which is well
below the ratios of many developed countries, whose government debt-to-
GDP ratios typically hover above 60%; (2) favorable demographics—
China’s dependency ratio, a measure showing the degree of dependents
(aged 0-14 and over the age of 65) to the total working population (aged 15-
64), has declined from around 50% in early 1990s to below 40% towards
late 2000s, and is not expected to rise until at least 2015, according to our
estimates; (3) we can still find some sectors with low penetration rates and
solid secular growth; and (4) a powerful central government with strong
execution capability to carry on the necessary economic reforms. We
recommend investors to wait for a better entry point until the above-
mentioned concerns are addressed before buying China’s secular growth
sectors.
What is changing: The “new resource tax” is now applicable for oil
production, natural gas and coal in the Xinjiang Autonomous Region.
• China model portfolio adjustment: We are bullish on: (1) consumer
staples; (2) expressways with good dividend yields; (3) new economy plays
such as high-tech manufacturing and strategic new industries such as new
materials, and new energy etc; (4) menswear with strong secular growth; and
(5) IPPs. We stay cautious on commodities, property, home appliances, and
energy.
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