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Market Outlook and Investment Strategy


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  • 1. The Greater China Fund, Inc. Market Outlook and Investment Strategy w w w . g r e a t e r c h i n a f u n d . c o m May 21, 2009
  • 2. Table of Contents Page Section 1: Market outlook 2 - 10 Section 2: Investment Strategy 11 - 12
  • 3. Market outlook Section 1
  • 4. Global Liquidity: Quantitative Easing Every OECD central bank is doing it ….. Aggressive injection supports asset prices ….. Source: Credit Suisse (4/2009) G3+ Central Bank Balance Sheet Size 50 100 150 200 250 300 350 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Euro Area Japan UK US Size index (100 at Jan ’07)
  • 5. Global Economy: Where are we now ? ‘ Green shoots’ are appearing Source: Credit Suisse (4/2009) G4 Economies - PMI New Orders Emerging Economies - PMI New Orders Index Index 16 20 24 28 32 36 40 44 48 52 56 60 64 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 US Euro Area UK Japan 28 32 36 40 44 48 52 56 60 64 68 72 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 India China (sa) Russia Brazil
  • 6. China: Recent PMI offers a light in the tunnel Source: CITICS as at May 2009 PMI rose for third consecutive month PMI New orders up faster than PMI finished good inventory, showing economic recovery
  • 7. Has the Chinese economy bottomed out ? Encouraging signs in key sectors Property Sales vol show stabilizing Primary Market Power output shows sign of recovery China: Monthly Power Generation Growth (Year-on-year Percentage, %) Property Sales vol show stabilizing – Source: Goldman Sachs as at May 2009 (Primary market — Beijing, Tianjin, Shanghai, Hangzhou, Guangzhou, Shenzhen, Chengdu, Chongqing, Wuhan and Nanjing) Power Output shows sign of recovery – Source: China Electricity Council and Citi Investment Research as at April 2009)
  • 8. China Auto sales to rebound on re-stocking Trailing 12 month inventory days Monthly passenger vehicle sales and yoy sales growth Source: CAAM as at May 2009
  • 9. China Consumer confidence – the next to rebound? Source: Bloomberg, National Bureau of Statistics as at May 2009
  • 10. Trend of massive earning downgrade is reversing China — Earnings Revision Index Source: IBES Aggregate and Citi Investment Research and Analysis as at May 2009
  • 11. China Resilient earnings and supportive valuations Source: JP Morgan (4/2009) * Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. US trailing PE is calculated as per reported earnings. For all other markets and sectors, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest. Companies with different yearends are calendarised to December yearends and are free float adjusted for aggregation. Historical numbers are from MSCI. 44.4 20.4 23.0 22.5 17.3 2010E -9.5 -0.8 -10.7 -9.8 -15.1 2009E Earning growth (%) -32.6 -9.7 -15.4 -22.1 -10.3 2008E 1.7 3.2 3.7 3.0 4.3 Current Trailing Div. Yield (X) 1.2 1.8 1.3 1.8 1.2 Current Trailing P/BV (x) 14.0 12.3 10.9 12.8 10.0 12m fwd 14.5 12.9 10.5 15.5 9.2 Current Trailing P/E (x) 13.3 China 7.6 11.2 10.7 11.5 2009E Korea EMF Asia USA * Global * Country ROE (%)
  • 12. Investment strategy Section 2
  • 13. Strategy Focus on policy sensitive sectors and earnings momentum
    • Prefer China to Hong Kong
    • Look for beneficiaries of strong infrastructure spending and stimulus package – construction companies and building materials
    • Quality China properties stock benefit from government policy support and market recovery
    • Prefer insurance to banks on the latter’s net interest margin contraction and potential credit cost hike
    • Bombed out cyclical stocks – material and technology – to lead early rally in restocking expectation
    • Focus on market leaders which play consolidator roles and with restructuring angle
    • Stock selection focus switching from valuation support to earnings delivery following the strong share price rebound from distressed levels
  • 14. Important Information – Regulatory Disclosure
    • This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate serving as the Greater China Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.
    • This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. The contents of this document which are based upon sources of information as provided by third party sources are believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This document may include forward-looking statements, which are based upon our current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance will not necessarily be repeated. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available.
    • Private investors in the Company referred to herein should obtain their own independent financial advice before making investments. This document must not be relied on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis of dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and other material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions.
    • Research Material
    • Baring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions expressed herein may change at anytime.
    • For data sourced from Morningstar: @2009 Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers: (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
    Compliance (Boston): May 14, 2009