GCH Feb 2012 Outlook

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GCH Feb 2012 Outlook Powered By Docstoc
					                                               For Professional Advisers only




                                                   www.greaterchinafund.com
Baring Asset
Management (Asia)

                              The Greater China Fund, Inc.
Limited
19/F, Edinburgh Tower,
15 Queen’s Road Central,

                           Market Outlook and Investment Strategy
Hong Kong

Tel +852 2841 1411



www.barings.com




                                                               February 2012
Position for China Recovery


   Inflation and policy risk should start to moderate. Policy sensitive sectors could reverse the
    under-performance.

   Market valuation is close to the historical trough on bearish sentiment. Upcoming earning
    downgrade risk is largely priced in.

   Expect China policy to place more emphasis on “growth”. Policy easing targeting the small
    and medium enterprises already begun.

   Raising wages will continue to support consumption. Social housing and public utilities
    becomes the new driver for fixed asset investment growth. Domestic demand will largely
    offset export slowdown.




                                                                                         1
China: Inflation is Peaking

      Growth rate (% y/y)                                                              Growth rate (% y/y)
25                                                                                                           100

20                                                                                                           80

                                                                                                             60
15
                                                                                                             40
10
                                                                                                             20
 5
                                                                                                             0

 0                                                                                                           -20

-5                                                                                                           -40
  2001         2002          2003         2004     2005   2006   2007   2008   2009   2010     2011

     CPI         "Core" inflation           Pork (RHS)


                                                   Tightening bias to remain, key is when it will peak

 Source: NBS, CEIC, UBS estimates (January 2012)
                                                                                                       2
China: No Longer Overheated

China: Purchasing Manager Index                     Interest rate
(PMI)
     China PMI                                               (% )         China 1 yr lending rate
65                                                   25
                                   Economic                               Required reserve ratio (small banks)
60                                 Expansion                              Required reserve ratio (large banks)
                                                     20

55
                                                     15
50
                                                     10
45

40                                 Economic            5
                                   Contraction
35                                                    0
 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11     Dec-04              Dec-06          Dec-08         Dec-10

                                                                 China shifting policy, but slowly

 Source: HSBC as at January 2012                    Source: CLSA as at January 2012
                                                                                                           3
China Banks: Steady Growth Expected

YoY growth rate of M2                                                                   Loan-to-deposit ratio
35       % Yoy                                                                                    %
                                                                                         79

30                                                                                       77
                                                                                         75
25                                                                                       73
                                                                                         71
20
                                                                                         69
                                                                                         67
15
                                                                                         65
10                                                                                       63

                                                                                               Aug-02

                                                                                                        Aug-03

                                                                                                                 Aug-04

                                                                                                                          Aug-05

                                                                                                                                   Aug-06

                                                                                                                                            Aug-07

                                                                                                                                                     Aug-08

                                                                                                                                                              Aug-09

                                                                                                                                                                       Aug-10

                                                                                                                                                                                Aug-11
     Sep-05


               Sep-06


                           Sep-07


                                       Sep-08


                                                   Sep-09


                                                               Sep-10


                                                                           Sep-11




                                                                                We do not share the view of an ‘imminent’
                                                                                                  banking crisis in China

 Source: YoY growth rate of M2 – CLSA as at January 2012; Loan-to-deposit ratio - CEIC, RBS as at January 2012
                                                                                                                                                                       4
Chinese Economy
What is the government debt position ?

                                         Central Government Debt Outstanding
                                                    (as a % of GDP)
250


200


150


100


 50


  0
               2005                      2006           2007         2008           2009     2010

                 US                        UK              EU Area          Japan          China


                                                        China appears to be able to service its debt
                                                with ease, even if it had to absorb all local govt debt

 Source :IMF, RBS as at September 2011
                                                                                                   5
 Impact of wage inflation in China

China: average annual wage                                                                                 Wage inflation in different sectors
          (RMB)                                                                                                 (% , yoy)
70,000
                                                                                                           18
60,000
                                                                                Double                     16
                                                                               compared
50,000                                                                         with 2010                   14
40,000
                                                                                                           12
30,000
                                                                                                           10
20,000
                                                                                                            8
10,000
                                                                                                            6
    0
                                                                                                                2004 2005 2006 2007 2008 2009 2010 2011 2011
         80 81 82 83 84 85 86 87 88 89 90 9192 93 94 95 96 97 98 99 00 0102 03 04 05 06 07 08 09 10   15                                            1Q 2Q

 Note: Assuming the average annual wage for 2015 = twice that for 2009, as 2010 figure is                            Manufacturing   Construction   Services
 not available




     Source: (China: average annual wage) Ministry of Human Resources and Social Security, Daiwa Securities Group as of 30 September 2010;
             (Wage inflation in different sectors) CEIC, HSBC as at September 2011
                                                                                                                                                     6
Valuation of MSCI China

Offshore-listed Chinese stocks are trading below the historical
mean in P/E terms
Forward P/E for MSCI China
30            (X)                                    26.4x
                         24.0x         P/E mean                                                                                   24.2x
25                                      +1 S.D.
                                        = 16.4x                                P/E Mean
                                                                                =12.8x
20
                                                                                           15.1x
15
                                                                                                                                                                                    9.5x
10

 5                                                                                                   P/E mean                                 7.9x                         7.5x
                                                                                                      -1 S.D.
                                      4.9x
                                                                                                      = 9.2x
 0
     Feb-96


                    Feb-97


                             Feb-98


                                         Feb-99


                                                  Feb-00


                                                             Feb-01


                                                                      Feb-02


                                                                                  Feb-03


                                                                                            Feb-04


                                                                                                      Feb-05


                                                                                                                Feb-06


                                                                                                                         Feb-07


                                                                                                                                     Feb-08


                                                                                                                                                Feb-09


                                                                                                                                                         Feb-10


                                                                                                                                                                  Feb-11


                                                                                                                                                                                  Feb-12
                             12M Forward P/E                          P/E Mean                       P/E mean +1 S.D.                           P/E mean -1 S.D.



  Source: Goldman Sachs as at February 2012
                                                                                                                                                                     7
Investment Strategy – China


   Increase exposure to policy sensitive sectors  valuation largely prices in policy risk and
    concern about the risk of economic slowdown

   Properties stocks become attractive on low valuation and recovery of transaction volumes

   Focus on earnings visibility and quality growth ideas in Technology and Internet sectors

   Revisit the export sector  focus on market leaders which play consolidator roles and with
    strong balance sheets

   Position for China Recovery  Overweight China in the fund




    Source: Barings
                                                                                       8
Valuation of MSCI Hong Kong

Forward P/E for MSCI Hong Kong

25            (X)
                               P/E mean
                                                        21.5x                                                                            22.1x
                                +1 S.D.
                                = 17.4x                                              P/E Mean    19.2x
20                                                                                    =14.1x

                       15.4x                                                                                                                                                          15.2x
15


10                                                                                                                                                                                 11.8x
                                                                                                           P/E mean                                  10.0x
                                        7.9x                                                                 -1 S.D.
                                                                                                            = 10.9x
 5
     Feb-96


                    Feb-97


                               Feb-98


                                               Feb-99


                                                          Feb-00


                                                                   Feb-01


                                                                            Feb-02


                                                                                        Feb-03


                                                                                                  Feb-04


                                                                                                            Feb-05


                                                                                                                       Feb-06


                                                                                                                                Feb-07


                                                                                                                                            Feb-08


                                                                                                                                                        Feb-09


                                                                                                                                                                 Feb-10


                                                                                                                                                                          Feb-11


                                                                                                                                                                                       Feb-12
                             12M Forward P/E                                P/E Mean                       P/E mean +1 S.D.                             P/E mean -1 S.D.




  Source: Goldman Sachs as at February 2012
                                                                                                                                                                             9
Investment Strategy – Hong Kong


   Selective in Properties  low real interest rates to support property prices and prefer big
    cap companies with strong balance sheet for future expansion

   Negative on Finance  steady profit growth but valuation largely reflects the positives.
    Prefer beneficiaries of RMB liberalization

   Neutral on Utilities  strong earning visibility in current volatile environment but valuation
    become stretched

   To be selective. Prefer beneficiaries of China consumption boom. Country weighting
    of HK is around neutral in the fund




    Source: Barings
                                                                                        10
Valuation of MSCI Taiwan

Forward P/E for MSCI Taiwan

 35            (X)
                         30.8x                                                                                                                31.2x
                                            28.6x       P/E mean
 30                                                      +1 S.D.
                                                         = 21.4x                          P/E Mean
 25                                                                                        =16.4x

 20

 15                                                                                                                                                                       14.5x

 10                                                          10.2x                             9.6x                     P/E mean     10.9x              10.4x
                                                                                                                          -1 S.D.
  5                                                                                                                      = 10.9x
      Feb-96


                     Feb-97


                                 Feb-98


                                          Feb-99


                                                    Feb-00


                                                               Feb-01


                                                                        Feb-02


                                                                                 Feb-03


                                                                                          Feb-04


                                                                                                      Feb-05


                                                                                                               Feb-06


                                                                                                                            Feb-07


                                                                                                                                     Feb-08


                                                                                                                                              Feb-09


                                                                                                                                                       Feb-10


                                                                                                                                                                Feb-11


                                                                                                                                                                         Feb-12
                              12M Forward P/E                           P/E Mean                      P/E mean +1 S.D.                        P/E mean -1 S.D.




  Source: Goldman Sachs as at February 2012
                                                                                                                                                                 11
Investment Strategy – Taiwan


   Demand for “smart” and “i-” products continue to benefit supply chain in the Technology
    sector

   Re-election of President Ma removed a cross-strait policy overhang. Domestic companies
    to benefit from inflow of capital and Mainland tourists

   Focus on stock specific ideas rather than a top-down country allocation decision.
    Taiwan remains an underweight position in the portfolio




    Source: Barings
                                                                                      12
Important
Information – Regulatory Disclosure
This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its
investment adviser affiliates in other jurisdictions. The affiliate serving as the Greater China Fund’s investment adviser is Baring Asset Management (Asia) Limited. In
the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial
Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.

This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their
directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or
dispose of any such investment. The contents of this document which are based upon sources of information as provided by third party sources are believed to be
reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This document may include forward-looking
statements, which are based upon our current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation to update or
revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. The value of any investments
and any income generated may go down as well as up and is not guaranteed. Past performance will not necessarily be repeated. Changes in rates of exchange may
have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment
vehicles which invest) in emerging or developing markets. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will
not be available.

Private investors in the Company referred to herein should obtain their own independent financial advice before making investments. This document must not be
relied on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and
prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis
of dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and
other material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions.

Research Material

Baring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of
research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions
expressed herein may change at anytime.




   Compliance (Boston): 21st February, 2012
                                                                                                                                                         13

				
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