Chinese New Year celebrations coupled with George Osborne's courting of Asian financiers to develop London as an offshore trading centre for the renminbi has refocused investor attention on China and the broader Asia market. But with increasingly divergent views of what the Year of Dragon holds for the region, should you be looking for entry points into these markets - or steering well clear?
The challenges
Last year was a tough year for emerging markets as these regions languished in the shadow of the eurozone crisis as investors shied away from 'risk-on' assets.
"After treading water in the early part of 2011, Asian markets underperformed significantly in September as market fears of a Greek default and risk of contagion in the eurozone intensified," says John Pellegry, Asian equities product director at Invesco Perpetual.
In sterling terms, Asian markets (as measured by the MSCI AC Asia Pacific ex Japan index) fell 14.8 per cent, under performing the world index by around 8 per cent, in large part due to the US market remaining flat for the year.
The fall highlighted the global nature of the world's economies and the deep trading linkages Asia shares with Europe and the US. "It has become clear that almost nowhere is immune from the debt problems in Europe and the US. Until real progress is made by politicians in the West, Asian markets, including China, could well remain weak," says Andrew Gillan, manager of the Edinburgh Dragon Trust.
But the eurozone debt crisis is not the only threat facing the Asia Pacific region. China, in particular, has been underperforming steadily since the end of 2009. While tighter monetary policy has played its part, other issues plaguing the so-called Beast of the East include slower land sales and souring loan books - evidence that the country's property boom is over. Specific concerns also remain around the Chinese banking sector, such as the impact of any fallout from the boom in shadow finance and the management of defaults arising from local government financing vehicles.
Alongside the above, 2012 will see a once-in-a-decade change in the leadership of the Chinese Communist Party. The key roles of president, prime minister and general secretary will all be handed on to the next generation of leaders - who will play a huge part in determining China's future course.
No 'hard landing'
Given the raft of issues facing China, the dominant debate continues to centre around whether the country's economy is in for 'soft landing' versus a 'hard landing'.
Those advocating a 'soft landing' scenario point to the fact that inflation and policy risk has started to moderate, while the government's pro-growth policies should benefit smaller and medium-sized companies. The Chinese economy continues to expand at an annual rate of 8.9 per cent - a multiple of the economic growth available in most other areas of the world.
Even ignoring the macroeconomic picture, valuations are now lower than they were during the global financial crisis lows, which could make for a great entry point for long-term investors.
"Although earnings visibility remains low in the current environment, 2012 earnings forecasts have already been reduced by around 10 per cent over the past six months. On that basis, the region trades on around 11 times PE [ratios] and yields around 3.5 per cent with a 40 per cent payout ratio - this income characteristic is often overlooked due to the region's growth appeal," highlights David Osfield, co-manager of the Alliance Trust Asia Pacific Fund.
He adds that the mid- to long-term fundamental drivers of growth in Asia continue look compelling: strong company balance sheets, high levels of savings, favourable demographics, and ongoing urbanisation - all of which should provide substantial opportunities for investors with a time horizon beyond the immediacy of the next headline.
Howard Wang, manager of the JPMorgan Chinese Investment trust is equally bullish: "We believe that very attractive opportunities exist in the Greater China markets in 2012. With the recent loosening of liquidity in China, we believe there is an opportunity to recapture gains in stocks and performance lost during the crisis-like atmosphere in 2011."
But he cautious that it is inevitable that the country will be hostage to sentiment and the many uncertainties plaguing the developed economies. A shock for one financial centre (read eurozone) is likely to quickly become a shock for all.
But Jim O'Neill, chairman of Goldman Sachs and the man credited with coining the Bric (Brazil, Russian, India and China) acronym, is unperturbed. In a recent interview with Bloomberg Television, Mr O'Neill said that China's continued growth is "the most important thing in the world." On potential Greek default, he said that "China creates the equivalent of another new Greek economy every four months. Greece itself is not that important."
He continued: "None of these developments diminishes the importance of China to the world economy. On the contrary, China will still be growing strongly compared to Western economies. Its share of world demand in everything from commodities to capital goods is so large that other economies' dependency on it will only increase."
He too rules out the likelihood of a hard landing, pointing to the Chinese economies steady growth, falling inflation and policy makers moving away from restraints and flirting with some sort of stimulus.
"Let me put it in the context of a bigger picture. I am assuming this decade China grows by 7.5 per cent. Translated into dollars, if they do that 7.5 per cent, China will contribute in dollar terms more than the US and Europe put together this decade."
Anthony Bolton, manager of the Fidelity China Special Situations Fund, shares similar views. "It will become apparent in the next 12 months that the house-of-cards view that many have of China is wrong. We won't see a hard landing and we won't see growth disappear - and that will lead to a reassessment of international views on China."
Despite his fund's disappointing performance since its April 2010 launch, Mr Bolton is sticking to his investment approach of holding a high exposure to medium and small-sized companies in the region. He is also holding firm to his view that China's reliance on the West will diminish. "My long-term thesis is that the China market will decouple from western markets. As we see a two speed world develop we will see money flowing into places where there can be growth."
Gold in the Year of the Dragon
We give a selection of China and Asia Pacific fund ideas below, but if you pay attention to Chinese astrology (and many investors in the region do), there is another way to play the story: gold.
Traditionally, the Dragon in the Chinese zodiac is a symbol of good fortune and intense power, and gold imports have been soaring in recent months to fuel an investment boom.
Albert Cheng, managing director in the Far East for the World Gold Council, an industry lobby group, comments: "Gold is traditionally bought as a gift during the Chinese New Year and 2012 looks set to be a strong year for demand, with gold imports hitting a record amount in November 2011, but we see this as part of a longer-term trend.
"China, along with India, has been one of the focal points in the gold market over the last decade as its share of total global demand has climbed from 6 per cent in 2000 to 18 per cent in 2010. This remarkable shift in the global demand balance has come about as the combined forces of growing wealth, deregulation, and increased access, but heightened economic concerns have also compelled consumers to act on their deep affinity for gold."
Chinese demand for gold shows no signs of abating. In Q3 2011, Chinese jewellery demand was 13 per cent higher on year earlier levels and is now the single largest market, accounting for 28 per cent globally. Demand for bars and coins over the same period expanded by 24 per cent year-on-year.
Mr Cheng continues: "China's demand is developing from a historically low base and we anticipate that this trend will continue. Near-term inflationary expectations and rising income levels are likely to support the investment case for gold as an asset class, especially given that Chinese consumers are high savers and are looking to gold to protect their wealth."
