NEW YORK — The Olympics are bringing fresh attention and money to China at a time when some investors might prefer to forget about it.
Stocks in the country have fallen sharply since last fall, offering a painful reminder that hard times can come to a nation where ”up“ once seemed like the only direction for the economy and stocks. The declines are raising questions about whether the much-heralded economic expansion of the world's most populous country is simply on hiatus or in for a more pronounced pullback.
Frederick Jiang, manager of the Ivy Pacific Opportunities Fund, contends the downturn in stocks could benefit savvy investors.
”I think it's going to be a great opportunity to buy Chinese shares because the long-term growth will be there. China is going to grow probably three times as fast as the global average,“ he said.
”It's a very strong valuation case,“ Jiang said of the decline that has left stocks down more than 40 percent and those shares restricted to Chinese investors down more than 50 percent from their highs last fall.
Even investors in diversified vehicles like mutual funds have taken a hit. China region mutual funds showed a negative return of 26.7 percent this year through the end of July, according to fund tracker Lipper Inc. Still, long-term investors have seen hefty returns. China region funds are showing a five-year annualized return of 21.7 percent as of the end of July and a 10-year annualized return of 16.8 percent.
But while the drop in stocks has meant investors could be getting a better deal when they buy, it doesn't mean the risks have disappeared.
Jiang blames a scarcity of resources from oil to raw materials like iron ore for squeezing economic growth. ”In the short term there are a lot of headwinds.“
He doesn't think that an economy running at a steadier pace rather than a sprint is a bad thing. The double-digit growth seen in the last five years is too much, he contends.
”I don't think China should go back to the 11 to 12 percent rate. That's overheated.“ He contends it should be closer to 9 percent to 10 percent.
A moderate pullback in the economy could actually benefit longer-term investors, Jiang contends.
”This slowdown should help China to sustain growth for the longer term,“ he said. ”When growth slows down, the demand for energy and the demand for metal will come down. That may bring down the inflation.“
Andrew Foster, acting chief investment officer of Matthews Asian Funds, also contends that China has grown too quickly but is encouraged that more of its economic expansion in recent years has come from domestic demand, not simply from exports to the United States and other countries. This signifies an economy that is maturing, he said.
That's not to say that the world's factory wouldn't be hit by a weakening global economy.
”A slowdown in the U.S. and especially a global slowdown will hit China,“ Foster said.
”Growth hasn't fallen off a cliff. It's holding up reasonably well but moderating. That's true in corporate earnings as well as the macro economy,“ he said.
While Foster thinks the drop in stocks in response to the cooling economy has been somewhat overwrought, he remains concerned about rising prices because of their effect on the economy and for any disruptions they could bring to economic reforms of the last decade.
”Every major political transition in China has had inflation at either the backdrop or at the forefront,“ he said, highlighting the importance of keeping prices in check.
But Foster hopes the government won't react hastily as it tries to control inflation.
”Does an increase in the inflation rate cause government officials to clamp down on the kinds of reforms that have so benefited China's economy?“
Ultimately, though, regardless of how bullish investors might be on the country's prospects, it's not wise to invest too heavily there, Foster warned. Rather, as with any investment, a measured approach is best.
”I do think investors should have some part of their portfolio dedicated to these emerging growth stories in Asia. I would question whether most investors are well-served to have dedicated exposure to a single country. It's just too volatile.“