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06 Jan 2011 10:24
Are rising economic stars China and India everything they’re cracked up to be for investors?
Since the global financial crisis, markets have been dominated by macro-developments and, according to Ashburton’s Jonathan Schiessl, each new piece of economic data has produced wild swings in market direction and sentiment. The resulting risk-on/risk-off trade has been highly frustrating for the long-term investor.
The only upside is that these wild swings present opportunities to buy mispriced assets from time to time and for this reason Schiessl sees opportunities in both China and India this year.
“Many emerging markets have been tightening monetary and fiscal policy from the ultra-loose stance taken during the crisis,” says Schiessl.
Schiessl says that China’s November consumer price index (CPI) rate of 5,1% was higher than most economists expected. The government responded with one interest-rate hike and a series of reserve requirement ratio hikes. “The bears say this is inadequate and interest rates do need to rise,” he says. “But I disagree that inflation is about to spiral out of control. Thus far, it is primarily food prices that are rising, but I expect this to reverse.”
He expects inflation to fall in the first quarter in 2011 due to the base effect.
With regard to India, the picture is muddier. Inflation has been higher for longer and looks more entrenched, according to Schiessl. But food prices are the primary driver and after a good monsoon inflation is now starting to fall. India’s Central Bank has been tightening policy for some time, so prices should stabilise.
Inflation is the reason many investors have approached China and India with caution, and worries over continued tightening led to a de-rating of equity valuations during 2010, even while company earnings have remained robust.
“If our view proves correct—that inflation concerns will abate in the first half of 2011—then current equity valuations look attractive to the long-term investor,” says Schiessl.
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