The Chinese economy is undergoing a restructuring and reform process as the government veers away from export-led growth that fueled its red-hot, double-digit expansion in the past to a moderated, but sustainable path that’s driven more by domestic consumption and investment.
The government is targeting a 7% GDP growth this year, down from 2014’s 7.4% rise, already the slowest pace of expansion in 24 years.
UOB Investment Management said the reform process is “painful” and the firm kept its cautious outlook on the Chinese economy.
“We continue to hold a cautious view of the cyclical outlook for the Chinese economy as it undergoes restructuring and reform. The reform process is both painful and difficult to execute and there is no guarantee that it can be executed without a major disruption to growth,” the Singapore-based asset manager said in its third-quarter investment strategy published on its website.
“The rally in Chinese equities seems more supported by liquidity and less by fundamentals. With further room to ease financial conditions in China, the equities market remains very supported and asset prices can move higher.”
With China’s cooling economy, UOB AM is “underweight” on so-called cyclical sectors in Asian equities such as energy and materials due to weak demand from the mainland. It is “overweight” on healthcare and technology, as well as on consumer and other staples sectors.
Its overall Asia Pacific strategy is to be “overweight” on Australia and Asia ex-Japan. It is “underweight” on Japan. This view is a result of its “bottom-up securities selection and does not necessarily reflect on the broader index.”
“For example, the overweight position in Australia is due mainly to the relative attractiveness of Australian materials and financials against the rest of the region. Similarly, the underweight position in Japan reflects our concern on the operating prospects of Japanese financials and materials companies.”
Back to China, UOB AM said the government’s efforts to liberalize cross-border flows could benefit asset prices outside of the mainland over time. In particular, the H-shares could be a “significant” beneficiary since A-shares trade at a premium over their Hong Kong-listed counterparts.
“Reforms will invariably create winners and losers and we continue to seek out more structurally attractive niches to invest in what is still a relatively high growth economy,” UOB AM said.
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