China more tempting but time not yet right

Investors thinking about dipping their toes back into Chinese equities markets are being given a warning: It’s not time yet.

Friday, May 20th 2016, 6:00AM

by Susan Edmunds

John Berry

China’s equity markets have been through a volatile year.

During the first half of 2015, China’s A Shares soared over 70% only to plummet around 50% by early 2016. They have drifted down 5% this year.

John Berry, of Pathfinder, said many investors were starting to consider whether it was time to increase their exposure to China, and other emerging markets.

“Chinese equities are around their five-year average, which is better value than US equities. They are starting to look fairly valued.”

But he said the time was not yet right.

Berry said there were still too many uncertainties. True annual GDP growth was unlikely to match the official predictions of 6.5% to 7% growth each year for the next five years.

“Expectations globally range from 5% to just under 7%. Some researchers use alternative calculations based on electricity consumption, rail cargo volume, loan volumes and manufacturing indices. These currently indicate GDP growth somewhere around 4%-5%,” he said.

“Secondly uncertainty remains around a range of key metrics - property, bad loans, currency settings, labour force changes and capital flows,” he said.

Berry said there would be a right time to get back into the Chinese market but it had not yet been reached. “I don’t think the risk-reward tradeoff at the moment is the right one.”

He said everything was so correlated that if China did improve, the rest of the world was likely to follow suit and offer the same gains.

“But if they go down, China will go down further. Chinese equities are volatile - if they fall with the rest of the world, the sell-off in China is likely to be much more dramatic. The time will come to re-invest in Chinese equities, but on a risk/reward trade off the time is probably not now.”

Tags: China Pathfinder Asset Management