London: The biggest investors in emerging markets say China is the best choice for 2009, betting plans to stimulate growth will lead a stock market recovery in the fastest growing major economy.
Investors with $63 billion (Rs3.08 trillion) of developing nation stocks put 15% of their funds into China, more than Brazil, Taiwan or South Korea, and the most in 13 years, according to data compiled by EPFR Global last month.
Building ground: Bridge pillars of the Beijing-Shanghai rail line project. Beijing’s state council announced a spending package last month for low-rent housing, transport, and tax deductions on industrial purchases. Jeff Xu / Reuters
Templeton Asset Management Ltd, Schroder Investment Management Ltd and BlackRock Inc. say they are adding to holdings in China.
While the MSCI China Index lost a record 53% in 2008, Merrill Lynch and Co. says China’s plans to spend 4 trillion yuan (Rs29.26 trillion) on bridges, housing and tax breaks will help make it the best performing market next year, boosting shares of China Mobile Ltd, the world’s largest phone company by value, and coal producer China Shenhua Energy Co. Ltd.
Investors are becoming more optimistic even as China faces its steepest slowdown in two decades, because the government has $1.9 trillion set aside in the world’s largest reserves. “We’ve got the mother of all stimulus plans,” said Plamen Monovski, an emerging markets fund manager in London for BlackRock, which oversees about $1.3 trillion. “Savings rates are high, prices of commodities have come down and employment is unlikely to collapse.”
The MSCI China Index advanced 12% since October-end and China’s CSI 300 Index of shares traded on the mainland, where the government limits foreign investment, gained 15%. The MSCI Emerging Markets Index fell 2.6% in the same period, extending this year’s decline to 55%, the worst in its 20-year history, according to Bloomberg.
The CSI 300 Index dropped 1.7% to 1887.07, a third straight retreat, while the MSCI China Index lost 0.5% to 39.62.
Mutual funds focused on China received a net $1.2 billion from investors in the past two months, compared with $25 million for Brazil, according to EPFR, a research firm in Cambridge, Massachusetts, that specializes in investment flows. India and Russia funds suffered a combined $778 million in withdrawals, the EPFR data show.
Funds investing in emerging market stocks worldwide raised their holdings of Chinese equities last month to the highest level since EPFR began collecting the data in 1995, increasing the weighting from an average of 10.7% in January.
Shares of Chinese companies accounted for 16 of the 30 best performers in the MSCI Emerging Markets Index as it rebounded from a four-year low in October, including 13 stocks that more than doubled.
China Mobile, China Shenhua and Ping An Insurance (Group) Co. of China Ltd are among 20 emerging market stocks worldwide that are the best of breed because of solid balance sheets and increasing profitability, according to Michael Hartnett, the New York-based emerging market strategist at Merrill Lynch.
Beijing’s state council announced a spending package last month for low-rent housing, roads, railways and airports, along with tax deductions on industrial purchases. The package is equivalent to about 18% of China’s gross domestic product (GDP), compared with the $1.4 trillion of stimulus plans under consideration in the US that amount to 10% of GDP.
China aims for 8% growth to create jobs and maintain social stability in the nation of 1.3 billion, according to Banking Regulatory Commission chairman Liu Mingkang.
Goldman Sachs Group Inc. predicts expansion will slow to 6% next year because of weaker exports and investment, half the 11.9% pace in 2007.
“Even at 6% growth, that’s very high when you compare it with the growth, or lack thereof, in Europe, the US and Japan,” Mark Mobius, who oversees about $26 billion in emerging market shares as executive chairman of Templeton, said in a Bloomberg Television interview from Hong Kong last week. “We are buying Chinese stocks pretty aggressively.”
China has more money to spend on stimulating growth than other developing countries as its debt is less than one-third of reserves, lower than any of the 20 nations tracked by Morgan Stanley.
The People’s Bank of China has sought to boost spending by reducing its key lending rate by 2.16 percentage points to 5.31% since September.
“There’s value starting to reappear in China,” said Allan Conway, the London-based head of emerging market equities at Schroder, which oversees about $170 billion. China is his biggest overweight holding. “What we highlight in China is their ability to stimulate domestic demand,” he said.
Lower borrowing costs and government spending may not be enough to keep China from contracting as the first simultaneous recessions in the US, Japan and Europe since World War II reduce exports, said Marc Faber, publisher of the Gloom, Boom and Doom Report.
“The Chinese economy...is also in recession even though the government won’t report recessionary figures,” Faber said. “Chinese stocks may rally as much as 30% in a trading opportunity before resuming their decline.”
Stock gains since October boosted the price of Hong Kong-listed companies to 9.9 times annual earnings, almost triple the valuations on Russia’s Micex index, and more than India’s Bombay Stock Exchange Sensex index at 9.6 times and Brazil’s Bovespa at 8.6. Chinese stocks remain 69% cheaper than the peak last year and 41% below the monthly average this decade.
China Mobile is valued at 12.8 times earnings, 69% cheaper than at its peak last year, according to Bloomberg data. Ping An, China’s second largest insurer, trades for 2.7 times book value, near the lowest on record.
“Some stocks are just fundamentally cheap,” said Jeff Chowdhry, the London-based head of emerging market equities at F&C Asset Management, which oversees about $150 billion. “People who are sitting on large amounts of cash should be nervous.”
Li Yanping in Beijing and Rishaad Salamat and Francine Lacqua in London contributed to this story.