Investors should not underestimate China’s upside potential, even in the face of significant market volatility and weak economic growth, says AllianceBernstein (AB).
In a recent research paper, Future Shock: How China’s Reforms Are Creating Disruptive Risks (and Opportunities), AB said investors must take a balanced view of the risks facing China.
“Global investors have been understandably transfixed by the recent gyrations in China’s equity markets,” the report stated.
“Add to this the fact that the country’s growth continues to slow and the government faces immense challenges in implementing its reform program, there can be little doubt that China poses short-term risks to investors.
“But just as it would be naïve to overlook the potential downside for China, so it would be easy, in our view, to focus on the negatives and ignore the positives.”
The Chinese market was down eight per cent on Monday and closed down a further two per cent on Tuesday, its biggest fall since early 2007, said Zurich investment strategist Charles Stodart.
According to Mr Stodart, the fall questions the government's ability to control market stability through its reform program, and pointed out that the "knock-on impact" on the broader economy remains to be seen.
However, Acorn Capital head of equities Douglas Loh, reminded investors that investing in China is a long-term play.
“Any shake up that comes out of China presents a new opportunity for a person to step in and make that investment,” Mr Loh said.
Both Mr Loh and Mr Stodart argue that China will provide long-term investment opportunities, underpinned by the rise of the middle class.
Mr Stodart said the middle class, which is expected to account for 50 per cent of the Chinese population by 2020, will drive such investment opportunities.
"For example, fashion, food, financial services, including insurance, and services more broadly," Mr Stodart said.
Moreover, AB said investors who invest early will benefit from such "sector plays".
“After the initial rush, the market will become less volatile and opportunities will be found in stock selection,” AB stated.
AB concluded that as China's reforms progress, it will deliver on its investment prospects.
“Given the pace of reforms to date – which has outrun many people’s expectations and surprised even us on occasion – we believe that the country has a better-than-ever chance of turning its aspirations into reality,” said AB.
“We believe that the best way for investors to position themselves ahead of such an event is to devote even more effort to researching the risks and opportunities that China represents.”
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