Barings joins China bears on growth worries

The UK fund house is underweight Chinese equities due to growth concerns, and has increased exposure to US and Japanese equities, expecting monetary easing to continue.
Barings joins China bears on growth worries

Some say China is overlooked and underinvested, but not all investors share the same optimism.

UK fund house Baring Asset Management is much more confident about developed markets than it is on China; having last month moved to underweight Asian and emerging market stocks in anticipation of a further slowdown in the mainland.

In a best-case scenario, Barings' Hong Kong-based Asia head of multi-asset, Khiem Do, expects China’s domestic economy to “bottom out” this year, with urbanisation projects contributing to a modest recovery in the next two years, which should boost China’s growth to around 7.5-8%.

However, he warns that China’s economy could perform worse than expected, with a GDP growth rate falling below 7%, largely due to leadership that “implements ‘reform’ rather than [actually] boosting the domestic economy”.

Do adds that the Chinese government “is focusing on trying to bring quality and harmony to the society, but not strong growth”. This ultimately could stifle GDP growth, he argues. He also points to potential inflation in the second half of the year, which would likely encourage Chinese officials to tighten policies.

Chinese companies will only experience 5-6% earnings per share growth this year, he estimates, down from the street consensus of 9%, adding that GDP growth will likely be 7.3-7.5%, which will make “the new leaders happy, but not the investors.”

Barings is much keener on developed markets. It argues that despite concerns over the US Federal Reserve tightening its quantitative easing programme, excess liquidity in DMs, paired with modest economic growth, should favour equities and selected high-yield bonds in developed markets.

As a result, the asset manager has been partaking in the 'great rotation' – the shift to equities from bonds – since September, as it searches for higher returns in the current low-yield environment.

Although US equities trading are at historical highs, they still offer better returns compared to bonds, he says, noting that in May Barings was overweight equities in the US, UK and Japan.

The firm has also been selling bonds to increase its cash level, adding that unless the yield on 10-year bonds can reach a level of 3%, Barings will continue to shift into equities and out of bonds.

The fund house is also positive in its mid-term outlook on Japan’s equity market, noting that prime minister Shinzo Abe’s aggressive fiscal easing should boost investment into the country. But he flags concerns about the potential impact of a devaluing yen on the country.

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