Salam aidilfitri

Is China Still Attractive After The Olympics?

The Beijing Olympics was a spectacular show. The opening ceremony impressed billions of viewers around the world. When it comes to China’s stock markets, however, the situation has been far from spectacular. They have been faring poorly, a few months, prior to the Olympics.

Economic growth measured by Gross Domestic Product (GDP) moderated to 10.1% year-on-year in the second quarter of 2008. This implies an economic slowdown (as compared with the GDP growth of 11.9% for the whole year 2007, and 10.6% for the first quarter of 2008).

Olympics: Boom and Bust?

Some investors observed there have been boom and bust cycles in Seoul, Sydney and Athens, before and after they organised the Olympic Games in 1988, 2000 and 2004 respectively. However, we do not expect to see such a cycle happening in Beijing. All the previous host cities contributed a large proportion to their nation’s economies. Beijing, on the other hand, contributes only around 4% to China’s GDP last year.

Beijing spent US$ 40.75 billion on urban infrastructure and US$ 1.89 billion on sport facilities, and those numbers add up to less than 1.1% of China’s fixed asset investments between 2005 and 2008 (source: People’s Daily). In terms of the equity market’s performance, although both the domestic A-shares and the Hong Kong-listed H-shares markets experienced a boom from 2006 to late 2007, they have not performed well this year, even during the Olympics. Hence, it is unlikely that there would be a post-Olympics bust.

China ’s economy has slowed down amidst the global economic gloom, but its GDP growth for 2008 may still be above the 8% target set by the Chinese government earlier this year. Inflation, on the other hand, which was at 8.7% year-on-year in February 2008, has been declining since May, to only 6.3% year-on-year in July 2008.

Conclusion

Despite weaker export growth, China’s economy may still grow by 8% or more in 2008. Domestic demand, based on retail sales, remains strong at over 20% year-on-year from March to July amidst the slump for A-shares. Infrastructure investment spurred by reconstruction needs after the natural disasters, will support economic growth, at least for the next two years. Inflation has lessen. Although market sentiment is negative in the short term, opportunities arise for mutual fund investors with medium- to long-term investment horizons.

China or Greater China equities seem attractive at their current valuation levels. However, they should be prepared for short-term volatility. China equity funds are single-market funds which may exhibit greater volatility than regional funds in the short term – we suggest investors place China or Greater China equity funds in the supplementary portion of their portfolio, which usually takes up no more than 20% of an overall portfolio. Nevertheless, the economic fundamentals, especially the Chinese market’s valuations, do indicate a good medium-term outlook.

source : ifast