There’s no doubt China is growing more slowly, but it’s still expanding at a rate of 7%-to-8%.
This is healthy in a global context, says Stephen Burrows, senior investment manager and product specialist of Global Emerging Markets Equities at Pictet Asset Management. His firm manages the Renaissance Emerging Markets Fund.
The main problem is many countries are dependent on China, so the shift to slower growth has impacted other emerging markets.
For countries that rely on commodities, the downshift has been an issue over the past year, he says. It’s one of the main reasons South Africa and Brazil have underperformed relative to other emerging markets.
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Further, there’s also some uncertainty about where the growth level will remain; next year, economists expect expansion of around 8% on a year-on-year basis.
“Once there’s more confidence in growth reaching some kind of bottom, then sentiment will improve towards China and the wider emerging markets,” says Burrows.
In his view, the country has already reached bottom in terms of growth momentum, with Q3 2012 growth hitting a low of 7.4% on a year-on-year basis. It was lowest rate recorded in the past three years, so he expects growth will start to pick up soon.
“There are already signs of improvement [in China], with retail sales number in September increasing at a rate of 14.2% compared to last year—the largest spike in six months,” says Burrows.
He urges investors to look for a continuation of rebalancing within the Chinese economy. This would mean a reduced dependence on infrastructure spending, with focus turning instead to investments that boost consumption.
“This is very important for China, as consumption only makes up a third of the overall economic growth in the country,” he says. “This is much lower than in other emerging markets, with the average around 60%.”
We should expect to see continued reforms to help boost China’s share of consumption. To do this, Burrows says the country could improve things like social security spending to bring down the high savings ratio in the country.
The key thing for investors to look at is increasing consumption under the new leadership for the next three-to-five years. Though the turnaround won’t occur quickly, he’s confident China is moving in the right direction.