The risk premium hanging over China is set to decline despite weakening growth in the Year of the Goat, according to BlackRock’s head of Asian equities, Andrew Swan.
In an outlook piece, Swan, as well as head of China equities, Helen Zhu, outlined what trends and themes they expect to come to the fore in the coming year.
Swan, who is Citywire AA-rated, said there were several factors helping to reduce investors’ concerns over risk.
‘Despite ongoing scepticism, reform has progressed across a number of fronts including fiscal budgeting, reducing the systemic risks to banks through local government debt and slowing the expansion of the shadow banking system.’
‘All of this is helping to reduce the risk premium overhanging China,’ he said.
Despite this positivity, Swan said he expects a weaker period of growth for China as high real interest rates restrain economic activity. ‘In such an environment, policymakers will have to act decisively to avoid being behind the curve.’
While policymakers have adequate tools, Swan said there are likely to be market bouts of volatility even as significant easing occurs as investors fret about policy effectiveness and depleting ammunition. He said this could create opportunities.
SOEs in a sweet spot
Meanwhile, Zhu focused her attentions on the reforms surrounding state-owned enterprises (SOEs). She said: ‘SOE reform will provide a number of opportunities that we haven’t seen before, in terms of improving efficiencies and properly aligning management incentives.’
‘We’re also interested in companies which will benefit from the government’s push to reorient exports; moving from low-end manufacturing, such as textiles and toys, towards products which are higher up the value chain and have some level of intellectual property attached. These are areas we continue to follow and examine as potential investment targets.’
However, Zhu cautioned that China's property market remains a risk factor and, while policymakers are trying to engineer a soft landing, the fragmented nature of the market makes that job all the more difficult.
Japan emerging from deflation
Looking more broadly at the market, Asian equities chief Swan also offered short-term predictions on three other key markets in Asia – Korea, Taiwan and Japan.
‘Korea is slowly embracing reform and should see the benefit of a domestic stimulus and weaker currency in 2015,’ he said. ‘Taiwan continues to house world class technology companies with increasingly important parts in the supply chain.’
‘Japan, meanwhile, is showing signs of emerging from its deflationary hiatus with some exciting reform appearing as companies begin to focus on improving returns to shareholders. All of these changes are helping Asia to build a more sustainable economic cycle which is great news for investors,’ Swan said.