INVESTMENT MANAGERS are highlighting China’s winning potential amid suggestions of an “Olympic effect” for stock market returns of host countries.
Managers said China’s real attractions lay in its long-term growth. Research shows shares in previous Olympiad nations have risen by an average of 28 per cent the year after hosting the games.
“The key for China is that inflation is under control and the growth story looks safe,” said Peter Lucas, global strategist of Ashburton Fund Managers, whose Chindia fund is heavily weighted to China and away from India.
With price growth in China moderating and the cost of oil off its peak, he said the Asian economic giant appeared to be drifting to a “nice soft landing”.
However, an analysis of stock market returns of Olympic host nations also shows that in most cases investors have seen improved performance in the year after holding the games. On average, stock markets in the past five Olympic host countries rose strongly in the 12 months after the games and all outperformed the MSCI World index, according to Ned Davis Research.
The US stock market gained more than 44 per cent in the year after the 1996 Atlanta games, while the 2004 host nation, Greece, was up 38 per cent. Even the Australian market, which was down 6.6 per cent in the year after the Sydney 2000 games, outperformed other markets at a time when the global technology boom was unravelling.
The research firm’s study said the rationale for this good post-Olympics performance was a tendency for slowing industrial production, declining inflation and lower bond yields in host nations.
Mike Lenhoff, chief strategist and head of research at Brewin Dolphin, the portfolio managers, said China’s pre-Olympics infrastructure investment also looked to have been better directed at broader growth than with some previous Games.
Of the $1,700 billion (€1,099 billion) of fixed asset investment in China in 2007, only $48 billion (€31.2 billion) was in Beijing, with the Chinese government estimating direct spend on the games at just $8 billion (€5.2 billion).
The case for a pick-up in Chinese share performance is supported by improved valuations after a heavy market sell-off earlier this year, some experts say.
With Chinese shares 50 per cent off their high, Gary Dugan, CIO of Merrill Lynch Wealth Managers, said: “On a tactical basis, we are warming to Chinese equities. In a simple model of when to buy risk assets, a period of poor performance coupled with a peaking in inflation and the prospect of looser monetary policy are conditions that generate a buy signal.”
Managers warned, however, that China’s economic success has not necessarily translated into high investment returns.
Over the past 15 years the MSCI China index is up just 6 per cent in US dollar terms, according to Aberdeen Asset Management.
Chinese firms often wrestle with fierce competition and can be subject to political interference, said Marcel Porcheron, research analyst at advisers Bestinvest.
Rather than a China-only fund, a more diversified fund covering the Asian region would suit most investors best, he added. – (Financial Times service)
