A devaluing currency and whispers of recession may have your clients panicking about China.
But they shouldn’t be, say experts, because while the economy is slowing and leaders may have made mistakes, there are opportunities for long-term investors.
“People are worried because they see signs of the economy really struggling,” says Kara Lilly, investment strategist at Mawer Investment Management in Calgary. “But it’s never the time to panic.”
There are legitimate concerns. During the first two days of 2016, the renminbi went from 6.49 to 6.56 versus the U.S. dollar. There are fears the currency will continue to devalue, but this is expected as China aims to rebalance.
“It’s going to be a volatile affair,” says Stephen Lingard, SVP and portfolio manager at Franklin Templeton Solutions in Toronto.
Instead of managing its currency and exchange rate solely against the U.S. dollar, China is now targeting a basket of currencies, he explains. This could include the yen, euro and competitors in their region like the won, though he adds China has yet to state exactly which currencies.
“China is doing everything that we [in the West] asked them to,” says Lingard. “They’re becoming a more market-oriented, liberal, open economy and capital market. And at the first signs of them doing it, I think we’re overreacting.
“Ultimately, I think they’re going to take it slow, but they do want the renminbi to be a significant reserve currency to rival the dollar. So these are all long-term steps to make that a reality.”
Another recent move: Earlier this month, Chinese regulators implemented a circuit breaker to help avert panic in the markets. But they axed it after it halted trading twice. “Again, they’re trying to manage volatility, and clearly making some errors,” says Lingard. “But directionally they’re doing the right thing.”
But will a recession have to occur for the tide to turn? A Unigestion report says no, stating the service sector is still growing. Though the currency has devalued, the exchange rate is still growing in lock-step to the U.S. dollar.
Lingard agrees. “We’re in the ‘no’ camp for a hard landing.” He adds while some parts of the economy like fixed-asset investments and industrial production are in negative growth, the consumer and service sectors are doing well.
“I was in China in September , and I visited cities that were tied to the industrial economy. It was very bleak. But when I was in Shanghai, [which is] not [a] manufacturing [city], they were booming. You couldn’t even get into some restaurants.”
He notes companies that deal with the Internet, consumption or logistics (like China’s equivalent of Amazon) are thriving. “I don’t think those are areas that are exceptionally cheap, but they do have good growth profiles and ultimately will do well over time.”
Opportunities in China
Amid the volatility, there are still pockets of growth that investors can benefit from. Lilly says advisors must first look at the time horizons of their clients’ portfolios.
“A long-term investor can stomach the type of volatility we’re seeing,” she says, adding she suggests a 10-year holding period. “But those with shorter-term horizons probably do want to get a bit more cautious in their asset mix.”
Look at the fundamentals, she says, and build a resilient portfolio that can withstand volatility. “Invest in companies that are wealth-creating, run by good people and priced at a discount to what their intrinsic value is.”
Lingard adds the onshore market is overvalued, so steer clear. But the offshore market, including H-Shares, MSCI China and Chinese corporations listed on the Hong Kong exchange are “beginning to look interesting.” Again, he says to focus on consumer services.
Meanwhile, the real estate market in certain cities, like Shenzhen (China’s Silicon Valley), has seen price appreciation upwards of 40% year-over-year, he notes.
“It’s not necessarily healthy in that there’s probably a lot of speculation,” says Lingard. “But it does show that this rebalancing from an old, industrial economy, to a new economy, is actually occurring in some parts of the economy.”
The bottom line, adds Lingard, is that long-term investors are getting attractive entry points for an emerging market.