Time for a contrarian bet on China?

On an earnings conference call this week, FedEx CEO Fred Smith seems to pour fuel on the fire to the argument that China’s performance isn’t rebounding any time soon, “The locomotive that has driven China’s growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate contrary to everybody’s hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted — grown at a far lesser rate or, in the case of certain European countries, have contracted, that’s reflected in the numbers in China”

The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 0.9% at 2060 yesterday, on worries about the latest friction with Japan over disputed islands as well as continued economic worries. The index remains close to the lows hit in the first quarter of 2009 and is down around 6% year to date and 15% in the last 12 months.

Owners of investment and unit trusts in Chinese equities are hoping that the latest sell off in Chinese shares is a bottoming process. For example, the near £0.5 billion Fidelity China Special Situations, managed by ex-star fund manager Anthony Bolton sits at 71.8p after being issued at 100p over 2 years ago, with a 15% drop in the last 12 months, after a shocker in 2011.

As well as the general slowdown in the Chinese economy as a result of weakness in its export markets, there is also disappointment that the government’s fiscal and monetary policy has remained conservative in part due to ongoing inflationary concerns. In addition, politicians are reluctant to rock the boat before the Communist Party Congress next month where there is expected to be a series of new appointments. In the meantime the focus has been on increased infrastructure investment which in the past has been of questionable value producing a series of high profile “white elephant” projects.

Is it time for a contrarian bet on China right now? Though additional stimulus measures may be announced in the Autumn and the stock market remains relatively cheap, specific investment in the country over more general emerging markets funds seems a risky prospect, with a dramatic re-rating unlikely any time soon. China depends on its export business and unless the eurozone in particular stages a remarkable recovery, the days of double digit growth in the Chinese economy may be a thing of the past. In addition, the extent of government control in the economy, difficulty trading the B shares of many listed shares plus the murky accounting practices of some entities (remember Sino Forest) will always make China a different proposition to an investment in the FTSE 100.

Contrarian Investor UK

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