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  • Climbing Out of a Recession with China

    2010 - 02.08

    When we first went into the global recession savvy investors reckoned that it would be China to lead the world out, not America. And they were right.

    The collapse of the US investment bank Lehman Brothers sent all the world’s stock markets crashing. But those savvy investors were right on the money when the BRIC stock markets surged straight back up as they bet on a global economic recovery.

    Russia’s RTS index is up 49% since the start of the year, China’s index has jumped 43% and Brazil and India have gained 33% and 22% respectively. In contrast, America’s S&P 500 index is up only 2.6% while the FTSE All-Share is up 3.3%.

    Mick Gilligan at broker Killik said: “If I had to pick China or the US in terms of their improvement in economic growth, I would probably side with China.”

    To combat the downturn China put £400 billion towards a monetary and fiscal stimulus and this seems to be working as last March the Chinese manufacturing industry enjoyed its first growth for nine months.

    It is expected to return to growth of 6.5% this year, down from 9% in 2008, but far more than Britain’s anemic -4.1% and America’s -2.8%.

    Bill O’Neil at Merrill Lynch has bought into BRICs since mid-March. They comprise between 10%-15% of his emerging markets portfolio. He said: “Emerging markets, to a greater or lesser degree, have their own independent and autonomous source of recovery.”

    In 1990, for example, 63% of exports from emerging markets were to developed countries, and only 37% to other emerging markets. Now it is 52% to other emerging markets and only 48% to industrialised nations.

    Adrian Lowcock adviser of BestInvest warns that should global economic growth slow then emerging markets could fall.  “If the growth figures coming out currently turn out not to be accurate, then we could see sharp falls in the local markets,” he said.

    Gilligan points out though that China’s stimulus strategy is likely to have more of an impact than a similar concept in the West as the money will be spent on development instead of refinancing banks. “The money has been allocated to growth projects like infrastructure development,” said Gilligan.

    Lowcock said: “Infrastructure investing is a traditional way to stimulate the economy. However, it needs to be well managed or there may be a risk of an imbalance in the labour force which could result in future problems.”

    If you are interested in investing in China then I would recommend the First State Greater China Growth fund which also invests in Taiwan. It is up 15.3% this year. I also recommend Jupiter China, which is up 18.5% this year. They both have a focus on the domestic Chinese market.

    Virginie Maisonneuve at Schroders likes Chinese banks. She tips ICBC, which is up 1% over the past 12 months. “It is starting to offer mortgages to the domestic market and is not scarred by ‘toxic debt’ in the way banks in developed countries have been,” she said.

    The Timber Investment Blog is sponsored by Greenwood Management. For more information on investing in Forestry please click here

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