Economic weakness and the anti-corruption crackdown continue to take a toll on China’s consumption demand, according to T Rowe Price fund manager Anh Lu.
‘We don’t see any signs of a revival in consumption yet, but once the anti-corruption measures stabilise, there could be some changes,’ Citywire + rated Lu, who manages the T Rowe Price Asia ex-Japan Equity fund, told Citywire Asia.
Lu said, in the past, much of the conspicuous spending had been driven by activities related to bribery and corruption.
‘What we are seeing right now is the normalised run rate of what the real economy is doing,' Lu said, adding it would possibly take another two years before investors saw the end of the corruption crackdown.
The resulting changes in demand and high penetration levels in some consumer sectors will also require investors to search out a different breed of consumer companies to back.
‘Now the challenge is for companies to come up with innovative products or products that are tailored for mass-affluent consumers,’ she said. ‘We are already seeing that with the changing margin structures of companies.’
Finding value in Chinese equities
The recent rally in Chinese shares has helped fuel strong gains for bank stocks, but Lu said she is focusing on other sectors to find value in the market.
While the Hong Kong-Shanghai Connect has opened China’s A-share market to more foreign investors, Lu said many of the stocks on offer were not necessarily high-quality investments.
‘However, the A share market has some very strong healthcare and industrial companies,’ she said.
Lu also added that recent market gains have been driven mainly by expectations of more easing measures, rather than jubilation over the opening of the China A-share market under the new stock link.
'China is slowing down, and over the past few quarters, growth has slowed down too much. The government had to step in with easing measures. This year, the markets expect more easing measures,’ Lu said.
At the end of February, China’s central bank unexpectedly cut its policy rate by 25 basis points, its second in three months, as the world’s second largest economy slowed to its slowest pace in nearly 25 years – 7.4% - in 2014.
At the end of January 2015, Lu had 26.5% of the fund's portfolio invested in Chinese equities.
In the 12 months to the end of February 2015, the T Rowe Price Asia ex-Japan Equity fund returned 10.19 %, versus the Citywire-assigned benchmark, the MSCI AC Asia ex-Japan index, which rose 8.9% in US dollar terms.