Will China surprise investors in 2016?

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The Federal Reserve move to raise interest rates has removed one major source of global uncertainty for this year, leaving developments in China at the top of investors’ watch lists, but experts argue China might positively surprise the markets in 2016.

2015 saw major market turmoil in China when in July the Shanghai stock market fell by 30 per cent, exporting volatility around the world. This continued in the first days of 2016, with China markets falling by 7 per cent and triggering new circuit breakers that halted trading.

Investor fears remain about China’s ability to recover from last summer’s turmoil and for its ability to boost economy growth.

Canada Life Investments chief investment officer David Marchant says China might surprise investors as its ongoing transformation into a consumer-led economy could be a key driver to overcome its debt.

He says: “China has been front of mind lately as it seeks to transform its economy from a focus on manufacturing and fixed asset investment to a more sustainable model promoting private enterprise and consumer spending.

“One side-effect of this has been a sharp fall in global commodity prices owing to declining demand from the world’s second-largest economy. “

While Marchant is not expecting huge growth from China, he does think the country might not disappoint as much as investors are expecting.

“While there have been plenty of concerns of a hard landing, China might surprise us by not falling as far as feared.

“We know that commodity prices cannot continue to plummet at their current rate. If economic growth in China doesn’t fall too far, there is the risk that commodity prices could suddenly snap back, causing inflation to rise faster than expected.”

Baring Asset Management chief investment officer Ken Lambden says China’s role in regional and global markets will increase in significance in the coming years as it further integrates into the global economy.

“With the yuan elevated to make up part of the IMF’s Special Drawing Rights and with the Chinese government taking the right steps to control its economy, I believe that, across the board, Asia will benefit in 2016,” he says.

Ross Teverson, manager of the Jupiter Global Emerging Markets fund, says the Federal Reserve interest rate hike has been widely anticipated for some time meaning it should already be largely reflected in emerging market equity prices, including China.

He says: “[In China] while the level of corporate borrowing has risen significantly in recent years, most of this is local currency debt from state-owned companies, so the risk to the economy is probably less than headline numbers suggest.”

However, for many the China slowdown remains a challenge for the coming year.

The recent fund manager survey from Bank of America Merril Lynch, which interviewed 175 fund managers globally, found 43 per cent of regional fund managers expect China’s economy to weaken in 2016, up from 4 per cent in November.

Columbia Threadneedle Investments chief investment officer Mark Burgess says China remains “a big unknown” as the pace of its economic slowdown is too uncertain to predict.

He says: “Our own assessment is that economic growth will be below the 7.5 per cent level seen in prior years, but will remain in positive territory, supported by domestic consumption.

“For growth to slip below 0 per cent would require a collapse in consumption and the government choosing to stand aside and do nothing to support the economy. That is not likely, in our view.

“Nonetheless, the slowdown in China is likely to be challenging, particularly for some of China’s emerging markets peers, and there are no examples in history of the kind of credit expansion that we have seen in China having a happy ending.”