Focus on emerging markets – China

China, for long the favoured emerging markets destination for investors seeking higher yields, is losing ground to other markets in South-east Asia.

Frederic Neumann, co-head of economic research at HSBC, told Reuters: “South-east Asia is coming into its own after being eclipsed by China for almost ten years.” Assets in China funds have fallen to $87bn at end of March, about 30% below pre-crisis levels and falling.

The fall in asset levels in China funds represents a structural change in investor sentiment, says Rajesh Ranganathan, a portfolio manager at Doric Capital, a hedge fund based in Hong Kong. He told Reuters: “Today, India and China are the places where people are looking for beta (risk), and Indonesia and Thailand are the places where people are hiding.”

China’s economy has been slowing for six consecutive quarters, leaving many investors concerned that China is heading for a hard landing. Most, like Jim O’Neill, head of Goldman Sachs Asset Management, believe China is instead heading for a soft landing. In January, he predicted 8.2% GDP growth for this year, then 8% in 2013.

Mark Mobius, head of emerging markets at Franklin Templeton, said: “Gross domestic product growth in China continued to ease gradually, alleviating market fears of a ‘hard landing’. The Chinese economy remained one of the fastest growing major emerging countries. GDP grew 8.1% year-on-year in the first quarter of 2012, compared to 8.9% in the final quarter of 2011.”

Ryan Tsai, Senior Investment Strategist, Greater China, Coutts, acknowledges the structural challenges facing the economy. But, he said: “We believe the trough has been reached. The economy grew 7.6% in the second quarter from the same quarter last year, roughly in line with consensus forecasts, while seasonally-adjusted quarter-on-quarter growth accelerated to an annualised pace of 7.4%, from 6.6% in the prior quarter.”

The optimists put faith in the ability of the Chinese government to steer the economy through the current difficulties. Investors have taken courage from a number of measures the Chinese government has implemented to relax capital controls. Chinese investors will be allowed to invest in foreign hedge funds through the Qualified Domestic Limited Partner programme, which will start by allowing only those funds with more than $10bn in assets under management. 

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