Morningstar Advisor - December/January 2012 - (Page 47)

“What is not understood is there is not the same systemic risk involved, as the funds being lent out are not on geared banking balance sheets. If a group of individuals or an SOE (state-owned enterprise) wish to lend their cash balances there are no new funds being created. If the money is lost, it will, of course, affect the ‘lender’ and impact their own liquidity, but wee will not see soaring nonperforming loans and the need for capital infusions to protect solvency ratios.” Raymond Ma, manager of Fidelity Funds China Consumer global leaders, if they aren’t well on their way already. Most of his current Chinese holdings are in Hong Kong-listed firms with long operating histories and owner/managers. He thinks that these companies are more in his analytical wheelhouse. Christina Chung, manager of Allianz RCM China and Hong Kong price and that some valuations have gone too low; he is adding to some of his long-term consumer plays. One area in which he remains negative is the banking sector, where he says that there is excessive debt. Agnes Deng, manager of the Baring Hong Kong China Fund Although Ma’s outlook for the next 12 months is slightly bearish, he says that China is in a good position to be able to withstand a global economic downturn. He says that China is now less dependent on exports because of a shift toward domestic demand and the fact that half of the country’s exports go to the Asian region or other emerging markets. Second, he says that despite aggressive monetary tightening over the past year, data through July showed that China’s economic growth momentum remained healthy. “Even with the current sequential slowness in manufacturing, China’s output is 50% above the pre-2008 crisis level, and industrial production has remained at healthy midteen levels. Retail sales growth and wage growth have remained resilient as well.” Chris Davis, manager of Davis NY Venture NYVTX The risk of a hard landing is not high in China, Chung says, because China is not burdened with external debt and has large foreign exchange reserves, a high domestic savings rate, a controlled currency, and a largely closed capital account. All of these attributes indicate to her that there will be no forced currency devaluation by hedge funds or capital flight by domestic citizens, which typically drives a downward spiral during times of crisis. Chung says that the media has exaggerated the the shadow banking system problem. She points out that it has always existed, and, given that there are no reliable statistics on this market, it is difficult to conclude that it is a problem that the central government cannot handle given the country’s current financial strength. About valuations and slowing global growth, she says that “for corporate earnings, we expect there will be some deterioration given the slowdown in China’s economy and, more importantly, a sharp decline in the global economy. However, the market has discounted ahead of this earnings uncertainty. In terms of P/B, the Morgan Stanley Capital International China Index and H-shares are already well below the 2008–09 crisis level.” Vincent Strauss, manager of Comgest Nouvelle Asia Deng continues to see China as a country with great growth prospects given its strong balance sheet and rising domestic demand. While she acknowledges there are some short-term issues, she says that “the Chinese authorities have sufficient monetary and fiscal tools at their disposal to encourage growth and prevent a so-called ‘hard landing.’ She is confident that inflation will tail off given that much of it has been driven by a sharp rise in food prices because of a poor summer harvest. In her view, the recent weakness in Chinese equities represents a compelling opportunity for investors to participate in the secular growth of the region at a low-price entry point. Martin Lau, director of Greater China Equities at First State Investments Although he is uncertain about the prospects of the Chinese economy in the short term, Davis says that he is fairly confident that over the long term it will have a larger share of global GDP and continue to gain on the United States and Europe. He cautions, however, that “anybody would be crazy to think that there would not be wicked corrections from time to time.” His focus is to take advantage of the inevitable chaos to pick up high-quality Chinese franchises that could one day emerge to be Lau says that in the near term, problems such as a possible rise in nonperforming loans to local governments and continued price pressures mean that caution is warranted. Nonetheless, he remains “optimistic about the longer-term domestic-demand story in China, thanks to structural drivers such as the growing middle class and continued urbanization.” In terms of companies, he says that “while the risk/reward of some cyclical stocks is looking more attractive, our preference remains for companies with more defensive characteristics such as strong cash flows and growing dividend yields.” Desmond Tjiang, managing director and portfolio manager for Great China and Hong Kong Equity at Pine Bridge Investments Strauss maintains his long-term view on China: It’s a market where it is difficult to make money. He says that the region favors workers over shareholders, and although manufacturing volumes are definitely much higher, prices are more controlled, which puts pressure on margins. But Strauss says that everything has a Tjiang is “cautiously optimistic” for 2012. Although he sees many risks and uncertainties ahead, he says that many of the concerns have already been discounted by the market. MorningstarAdvisor.com 47 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012