Aviva Investors remains underweight Chinese equities

Will Ballard, head of Emerging Market & Asia Pacific Equities at Aviva Investors, advises caution for investors looking to capitalise on recent events in China.

“China’s Q2 GDP growth came in at 7.0%, beating economists projections for a 6.8% rise and showing no further deceleration from the prior quarter. Monthly activity data released also beat expectations across the board with some initial signs of a rebound; factory output hit a five month high. Weakness in the second quarter versus the first was visible within infrastructure investment and consumption, however there were signs of this bottoming in May as the State Council and NDRC moved to encourage investment.

“China remains in the midst of a period of transformational change as it moves to rebalance its economy to a path of longer-term structural stability. The opportunities offered for investors within this huge and changing market should not be underestimated, but neither should the risks. The recent equity market volatility has thrown into focus the disconnect between the domestic equity market and the fortunes of the underlying economy. After an unprecedented run over the past two years, China’s domestic equity market has suffered a dramatic correction. Since its peak on the 12th June the Shanghai Composite has fallen nearly 30 per cent. The subsequent action by authorities to stabilise the market has so far shown mixed signs of success.

“Despite a stronger than expected underlying economy and the recent correction in the domestic equity market, we retain a substantial, long standing underweight position in China. As long term investors, we can see the potential China has to offer. However we are mindful of the disconnect between what remain bubble-like valuations of some of the domestic equities and the more attractive valuations found in Chinese companies listed in Hong Kong or offshore.”


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