Focus on Asia: new leadership in China to boost consumer sector

Financial market practitioners believe the change of leadership in China will to drive the performance of the consumer sector.

At the 18th National Congress of the Communist Party of China this week the once-in-a-decade leadership change in the country was announced. This puts an end to the waiting game and removes uncertainty that has surrounded China in the run up to the event.

AllianceBernstein says a key policy for the new government will be a focus on the exchange rate. The firm expects the new leadership to “maintain the upward pressure as part of efforts to rebalance the Chinese economy.”

The renminbi has already appreciated by about a quarter against the US dollar in the last six years. A stronger local currency decreases the price of imports into China, which will raise the purchasing power of the country’s 1.3bn population and drive up consumption.

Martha Wang, portfolio manager of the Fidelity China Focus Fund, comments: “I think the new leadership will be willing to accept lower GDP growth as it will focus on quality rather than quantity of GDP growth. This means a continued focus on the domestic consumer and further enforces structural growth opportunities in consumer-related stocks.”

Fidelity sees the change in leadership as a positive development which will benefit the market as a whole, as the implementation of China’s five-year plan gathers steam. It expects markets to rally on the news.

However, as the leadership line-up was revealed today, Chinese equities fell. The Shanghai composite index closed down by 1.2$ and the Shenzen Composite by 1.55%. In Hong Kong the Hang Seng was 1.4% lower near the close.

News reports suggest the drop reflects investor concern regarding the overly conservative leadership choices.

But AllianceBernstein says the conservative government will be “characterized by a steady hand rather than radical change,” which is a positive step for the country.

Anthony Chan, Asian sovereign strategist at AllianceBernstein, says: “In pursuing this gradualist approach, we think [the Chinese government] should be successful in fending off the current slowdown, with our forecast for economic growth next year seeing it tick up slightly to 8.1% from 7.7% in 2012.”

Fidelity’s Wang says the “leadership issue and the subsequent infighting among potential candidates has been more public than ever before,” which gave a strong headwind to performance of the Chinese market so far this year.

But she is convinced the market has a lot of potential for growth, and there are many companies with strong fundamentals, “which have been indiscriminately punished by political uncertainty,” and are therefore trading at attractive valuations.

Raymond Ma, portfolio manager of Fidelity’s China Consumer Fund, adds that the new leadership will place more focus on acceleration of urbanization and income re-distribution.

“Overall, I believe that a more pro-consumption policy will be in place to drive domestic demand and, as a result, consumer sectors will continue to benefit,” he concludes.

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