This week witnessed China becoming the world’s second biggest economy, overtaking Japan. Japan’s economy was worth around $5.5 trillion at the end of 2010, while China’s economy was worth around $5.8 trillion.
Japan has suffered from a drop in exports and reduced consumer demand, while China has enjoyed a well-documented manufacturing boom. However, as China’s near neighbour, it’s not all bad news for Japan, as China is its main trading partner and it is also benefitting from leisure tourism from China’s burgeoning middle class (over one million Chinese visited Japan in 2009).
Many of Broadgate Mainland’s asset management clients remain bullish on Japan’s prospects – although stockpicking remains crucial. John MacDougall, Fund Manager, Shin Nippon Investment Trust recently highlighted the following areas as long-term growth drivers for Japan: the medical market; ‘frontier’ markets such as robotics and space technologies; infrastructure; and green energy. These could be described as the ‘hunting grounds’ for growth opportunities.
For now, the US remains the number one global economy, but for how long? Some pundits are estimating that there is probably about a decade until China becomes the world’s largest economy.
Many people however, including a large number of UK fund managers, are predicting trouble ahead for China. You only need to pick up a newspaper or watch the television news to be bombarded by talk of housing bubbles, inflation and currency woes.
Other managers, including Alan Gibbs, manager of Broadgate Mainland client J O Hambro Investment Management’s Waverton Asia Pacific Fund, suggests that any volatility resulting from inflation/tightening fears should be seen as a significant buying opportunity. He says that inflation has been rising across the board in Asia for some months but feels that this is mostly a transient phenomenon led by La Nina-induced food prices and Bernanke-induced commodity prices.
Anthony Bolton, manager of the Fidelity China Special Situations investment trust who is currently residing in China is also bullish. His recently reported views outline how China aims to significantly lessen its dependency on rest of the world following the shock of the financial crisis, and how its policy from now on will be geared towards making the Chinese economy more self-reliant and less dependent on exports.
Stockpicking remains key to both Anthony Bolton and Alan Gibbs’ approach. Bolton is seeking growth opportunities in education, pharmaceuticals and financial services, while Gibbs’s fund is looking at social housing, urbanisation and infrastructure as well as companies which can benefit from a growing middle class.
By 2030, it is predicted that China will play host to a middle class population (daily per capita income of USD 10-100) of 3.2 billion people, dwarfing the USA’s projected 400 million middle-class population.
Throughout human history, China has been the dominant world ‘superpower’ on many occasions, and it looks as though, over the next ten years or so, it could be about to do so again.
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