The New Star Asian Opportunities Fund, which is in the top quartile of its sector since launch*, has a focus on China and Hong Kong. As the Chinese New Year approaches, Jorry Noeddekaer, a member of New Star's Asia excluding Japan equities team, looks at China's growth potential and key economic themes.
Economic growth in China exceeded expectations in 2006, with the country's economy accelerating at its fastest annual rate in more than a decade. New jobs created in urban areas exceeded 11.8 million for the year and net exports rose by 74%. The year's double-digit growth was driven by the manufacturing sector, with domestic consumption and exports rising strongly.
The urbanisation of the predominantly rural population has boosted the country's growth. Productivity has risen as workers have left behind their agricultural roots to work in industrial factories, with their modern and relatively efficient production lines. This lends further strength to the country's already robust manufacturing capabilities.
China's strong economic growth brings with it inflation risk but this remains at an acceptable level. Inflation, as measured by the Consumer Price Index, inched down from 1.8% in 2005 to 1.5% last year, or half the government's 3% target. Wages have risen strongly but companies have generally been able to maintain or improve profitability through growth in sales revenues and increased productivity.
One positive consequence of the growth in wages has been a boom in domestic consumption. This is likely to continue and the New Star Asian Opportunities Fund is positioned accordingly.
Economic growth in Greater China has attracted foreign investors and fuelled strong gains in the stock markets of China and Hong Kong. Heavy investment has been made in fixed assets and infrastructure, with the urban residential property market also expanding quickly. In recent months particularly, the markets have benefited from abundant liquidity. In Hong Kong, stocks in general performed well, with asset-heavy companies such as property groups and companies with exposure to China the standout performers.
In China, foreign investment has combined with export growth and a closed capital account to increase liquidity further. This has resulted in significant rises in the domestic A-share market but brings with it risks to overall economic stability. Overheating could result in increased asset price volatility and signal the beginning of an unsettling boom and bust phase for the economy. The Chinese government's handling of the economy in recent years, however, offers reassurance, with stability supporting the country's growth. While a more aggressive stance on monetary tightening may be adopted in 2007, this is unlikely to be overly severe and the growth outlook for the Chinese economy remains positive.
In such circumstances, the prospects for investors in Chinese companies are healthy. Infrastructure spending is likely to continue and the 2008 Beijing Olympics will provide a further boost. China's growing demand for commodities implies that its economic growth will be sustained, leading to potential earnings upgrades in many Chinese sectors.
SECTORS AND THEMES
Infrastructure
The Chinese government's capital spending on infrastructure is expected to rise significantly over the coming years. Sectors that will benefit from aggressive spending growth include roads, railways and subway networks. Companies involved in construction materials and infrastructure are likely to be the main beneficiaries. The New Star Asian Opportunities Fund's current holdings include Road King Infrastructure, which invests in toll roads and bridges, and PYI Corporation, an investment holding company specialising in infrastructure.
Environment
The Chinese government is committed to preventing environmental degradation and has launched a programme of investigations and prosecutions of domestic companies to ensure compliance. Key industries that stand to benefit from the policy include water treatment, air purification and natural gas supply. The fund holds a number of companies that should benefit from such developments including China Water Affairs Group and Sino-Environment Technology Group.
Domestic consumption
Rising wages in China and increased fiscal spending on education, health and social security will have a positive effect on consumer spending. China Mobile, a long-term holding of the fund, has already done particularly well from strengthening domestic demand, with its subscriber numbers growing and operational performance remaining healthy.
*Sector: Equity Asia Pacific ex-Japan. Source: Standard & Poor's, performance data in fund's base currency, net of fees, gross income reinvested to 29/12/06.
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For further information, please contact Trina Arthur at New Star International on +44 (0)20 7225 9574.
NOTES TO EDITORS
New Star important facts:
- New Star, one of the UK's fastest growing fund management companies, was founded in June 2000 by John Duffield, previously the founder of Jupiter Asset Management, which he built into one of the most successful retail investment businesses in the UK.
- New Star is expanding its international business in response to the growing demand from investors in Continental Europe. The aim is to become a leading mutual fund provider over the next few years, offering international investors the investment expertise of one of the fastest growing and most successful UK fund management groups.
- New Star's international strategy is to develop key partnerships in local markets.
- New Star International's website can be found at www.newstaram.com.
Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice.
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