This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Gary Dugan, Chief Investment Officer Asia and Middle East at Coutts predicts what the next 12 months have in store for China.
This year’s first gauges of China’s economic strength have been a bit disappointing, but we don’t think this is a harbinger of weakness in the economy or stock market in 2014. There’s a good long-term story for China, based on better-quality economic growth, although the pains of the reform programme may hold the markets back for the moment. We think investors in general will continue to look for buying opportunities in Chinese equities, as are we.
The government’s official purchasing managers’ index, released last Wednesday, came in at 51 for December. This was below the consensus estimate of 51.2 in a Bloomberg survey and down from November’s 51.4 reading. The separate HSBC/Markit gauge fell to 50.5 from 50.8 a month earlier, but was in line with analysts’ estimates.
We see growth in China’s economy slowing towards 7.5% in 2014 as a result of structural reforms from the third plenum (a theme we featured in the last edition of Global Economic Quarterly), though we emphasise that the focus is on the quality of growth that the reforms aim to deliver.
The reforms focus on “good” sectors that lead to higher productivity and reduced environmental damage. Indeed, many of the other reforms – which address increased market forces in the economy, financial liberalisation, land, population and public finance – are steps in China’s next phase of economic expansion.
Risks to the long-term outlook include any potential conflicts that arise from a stronger central government and the economic objectives, but we believe the reforms will provide appealing long-term investment opportunities.
