China equities: year of the black water snake

China equities: year of the black water snake

This month marks the beginning of the Year of the Black Water Snake in the Chinese lunar calendar. In Chinese astrology, the snake typically represents character traits such as intelligence, gracefulness, flexibility and a preference for the finer things in life. Furthermore, when it comes to decision-making, snakes can be extremely analytical and, as a result, they tend not dive into situations without careful consideration. They can also be very effective at achieving the things they want, while being highly strategic and tactical in the process.

While snakes might be perceived as materialistic creatures, preferring to surround themselves with the best life has to offer, this often means they work harder and go that extra mile to achieve their objectives. Traits like being influential, motivated, insightful, and highly intellectual may best characterise snakes, and these creatures can work well with others, enjoying being recognised and rewarded for their endeavours. Water snakes also have a reputation for transformation, similar in many respects to the Chinese economy in recent periods.

Chinese zodiac snakes are always female or yin and this influence could be in sharp contrast to the moody, broody, maddening male yang energy that drove the Dragon to distraction during 2012 and frustrated many investors. Instead, we believe yin is in keeping with other calmer energies that are likely to prevail this year.

Looking ahead, if the Black Water Snake holds true to form, it is our belief that the behaviour of the Chinese equity market in 2013 should be more suited to many investors than the unpredictability generally experienced last year under the gaze of the dragon - a creature characterised by its dramatic and often volatile nature.

Like the Black Water Snake, the Chinese economy can be flexible, dynamic and is hard-working as it looks to achieve superior growth supported by what we see as strong fundamentals in the consumer sector, underpinned by rising domestic demand and a growing middle class. The IMF puts the world’s second largest economy on course for GDP growth of 8.2 per cent this year and 8.5 per cent the next.        
In terms of future positioning, we remain positive on companies in the Consumer Discretionary sector, which should we believe benefit from the government's policies on improving consumer spending, stable demand and strong economic growth. Companies in this area include luxury brands, popular restaurants and department stores. All these play into an economy which is motivated and believes in being rewarded for its endeavours, themes associated with the Black Water Snake.

We favour a strong technology sector and providers to the growing wireless communications industry and makers of components for digital televisions. We favour companies linked to Telecoms too, as we continue to see renewed signs of recovery in the economy and therefore smart phone/mobile technology spending and enhanced 3G activity.

In Chinese mythology, the Black Water Snake also signifies a species which believes in being cautious and careful, and being mindful of the risks that can lie ahead although often hidden. Similarly, China’s central bank has been mindful to the threat of inflation and overheating in the economy in recent periods but is also now aware of the need to maintain lower interest rates in order to achieve its aims. Following this, we are positive on property in light of low real interest rates which have helped to support elevated real estate prices.

We also expect that this year stock selection will come to the fore in the search for attractively-valued companies with positive earnings surprise potential. Like the Black Water Snake’s preference for having carefully thought-out tactics, we expect our bottom-up stock selection process to be of benefit, especially in the Consumer and Industrial sectors. Here, we are taking the opportunity to be more selective and add to companies with good growth prospects, while remaining tactical on relatively more expensive stocks.

Kung Hei Fat Choy! May you prosper this Chinese New Year!

Agnes Deng is head of Hong Kong China equities at Baring Asset Management

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