China’s ‘orderly deceleration’ thrills asset managers

China will continue to be one of the key investment destinations next year given its stabilizing economic growth and the structural transition toward a consumption- and service-driven economy, which are expected to generate high returns, international asset managers said.

Rick Lacaille, global chief investment officer at State Street Global Advisors, said that 2018 could potentially be a “break-out” year for China. Opportunities will continue to expand as the economy transitions from the old growth model to a new one.

“We have been quite consistent in saying that we don’t think China will have a hard landing. And we remain confident that China will have this orderly deceleration,” Lacaille said.

Opportunities will continue to emerge in sectors such as e-commerce, healthcare, and tourism, which tend to benefit from the economic restructuring.

The Chinese bond market also looks attractive given the high yields and the relatively lower defaults and currency risks compared to markets that offer similar yields, Lacaille said.

China is also a major reason why the Boston-based investment firm, which manages $2.67 trillion in assets, is overweight on emerging markets next year.

“When we overweight the emerging markets, it is partly because we think China will continue to be one of the biggest contributors to global growth in 2018,” Lacaille said.

He said 2018 will be a year of consolidation for the US dollar, which is less likely to strengthen significantly, so could offer support for equities and bonds of emerging markets.

On investor concerns about China’s credit system, Lacaille said the regulators’ move to control the less-regulated part is welcome and the risk of a faster-than-expected credit contraction is unlikely to become reality next year and in 2019.

Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset Management, shared Lacaille’s bullish outlook on China.

“Structural changes will continue to take place in 2018, resulting in lower mediumterm growth. (Economic rebalancing) will continue to provide investment opportunities across service sectors such as e-commerce, e-payments, social media, education and insurance,” Wong said.

Hayden Briscoe, head of fixed income Asia Pacific at UBS Asset Management, said China’s deleveraging effort and reform, which are driving the near-term slowdown, are positive for the country’s longterm growth outlook.

He also said that China’s rising government bond yields are an opportunity for investors to include long-maturity bonds in their portfolio mix.

Such a strategy would allow them to benefit from high nominal and real income, as well as potential capital appreciation, he said.