There's plenty of potential in China

February 5 ushers in the Year of the Pig
Jonathan Sloan

CHINESE New Year is fast approaching on February 5, when the Chinese community all over the world will celebrate by lighting fireworks, giving red envelopes of money to children and enjoying celebratory meals to usher in the Year of the Pig.

On the grand scale of things, China is the manufacturing hub of the globe, making it the largest consumer of raw materials including over 30 per cent of base metals.

From an investment perspective, Chinese stocks ended 2018 on a sour note, with both the Shanghai and Shenzhen stock indices falling into bear market territory (-25 per cent and -35 per cent respectively).

Last year's drawdowns were driven by a combination of factors including escalating trade tensions between the US and China which weighed heavily on investor sentiment. This together with a faster-than-expected slowdown in domestic growth indicators, and coupled with moderating earnings expectations from previously elevated levels among the major Chinese tech companies.

Given the scale of these moves, we think a lot of bad news has been priced in, and sentiment there is already very weak.

A recent set of Chinese economic data, ranging from manufacturing surveys to broad credit growth, points towards further slowdown in the economy. We think that the growth slowdown is mainly caused by ongoing efforts to deleverage the domestic financial system in order to curb systemic risks.

A hard-landing scenario for the Chinese economy still looks to be an unlikely tail-risk event. Over the past year, the authorities have been implementing stimulus measures to moderate the pace of the slowdown.

On the upside, recently re-opened trade negotiations between the US and China offer some possibility of a de-escalation in the ongoing trade skirmish.

Investors should keep a clear-eyed perspective on the long-term prospects of the Chinese stock market, rather than solely focusing on its short-term gyrations.

The Chinese economy still has enormous potential to grow and mature over the coming decades, with Chinese companies well poised to take advantage of this.

The Chinese stock market provides important diversification benefits in the context of an overall investment portfolio which, more often than not, is heavily tilted towards developed market assets.

That being said, the Chinese stock market tends to be more volatile than your average developed counterpart and investors should ensure that they have a sufficiently long investment horizon as well as the appropriate level of risk tolerance to weather volatile periods such as those in 2018.

Overall, the positive long-term prospects of the Chinese stock market, coupled with its diversification appeal, warrants a place within a diversified portfolio for investors with the right risk tolerance.

:: Jonathan Sloan is director at Barclays Wealth & Investments NI

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