China remains as one of the most robust economies in the developing world.
Unlike many other parts of the world, China has a full arsenal of monetary, fiscal and administrative tools that can be used to stimulate its economy when it decides stimulus is needed. It is for this reason that investors can remain bullish in China as the government has the ability to support a cyclical upturn with policy changes. In July, China’s CPI raised at its slowest pace in 30 months which offered even more room for monetary policy easing. The fall in consumer prices over the last few months had already allowed the People’s Bank of China to cut lending rates twice. In response to the additional leeway given to the central bank after a fourth consecutive month of inflation cooling, stocks have risen in expectation for monetary policy easing.
The Shanghai Composite Index has risen 3% over the past 5 sessions while the Shenzhen Composite Index rose 1.5% to 909.69. The rally signals confidence that the slowing growth in China will encourage the government to make moves to boost growth. Economists and strategists expect more rate cuts as well as cuts in the reserve requirement ratio. China is also in a unique position due to their strong financial position and could cut taxes to support domestic demand. Even in the face of slowing growth, China remains an attractive market as they are one of the few regions that offer 7-8% growth prospects at less than 10 times estimated earnings.
It is time to start adding or initiating new positions in the Chinese market, which is trading at spectacularly valuations relative to its 30-year history. The Chinese government is in the process of launching another major round of Fixed Asset Investment (FAI) focused economic stimulus programs. This has largely reduced China’s hard landing risk and should remove market concerns. The Excel China Fund is well positioned to take advantage of these opportunities in order to add companies with good growth prospects and strong balance sheets, which we believe will positively reward investors in the coming years.