China’s bright prospects outnumber the dark spots on various fronts as it takes a more constructive stance to the market’s cyclical area. This is, in a nutshell, the impression of certain Kairos managers after a series of meetings with about thirty local Chinese managers in recent weeks.
However, the most attractive long-term themes remain those related to the new economy (the Internet, healthcare, environmental protection, water treatment, electric cars, education, etc.), with the groundwork in place for economic recovery in the short-term. These are the first positive results of the government’s mini-stimulus package, which includes investments in railways and public housing construction, tax incentives for small and mid-sized companies and the elimination of certain restrictions to home buying. These measures have caused growth to stabilize and the target growth rate of 7.5% should be confirmed for 2014.
The central bank’s easing measures, bolstering the currency and injecting liquidity into the system, have also contributed to strengthening these positive trends, while the authorities’ structural reforms to combat corruption, improve the corporate governance of various state companies, encourage the influx of private capital and align management’s remuneration with companies’ results have contributed as well. This pro-active approach has put to rest fears of a hard landing for Asia’s giant and has piqued local managers’ interest especially in stocks trading at prices that reflected this scenario, foremost cyclicals, financials and real estate.
Prospects are also bright for the car industry, with respect to both traditional and electric vehicles. Over 22 million new cars are sold in China each year, and the major companies (often joint ventures with western carmakers) can now count on 20% to 40% growth in earnings thanks to the market’s structural growth and improvements in profit margins.
Within the new economy, the Internet remains the most interesting opportunity, although it is important to be selective: indeed, we are seeing a shift from business models based exclusively on online services to other models in which offline services will play a crucial role. The companies that manage to capture and adapt to this change will be able to expand their market shares and boost profit margins.