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It’s the Year of the Rooster, but is there much to crow about?

Home / Perspectives / It’s the Year of the Rooster, but is there much to crow about?

Gary Greenberg, Head of Hermes Emerging Markets
27 January 2017
Emerging Markets

With Chinese New Year now upon us, Gary Greenberg, Head of Emerging Markets at Hermes Investment Management, gives his views on China, and what lies ahead in the Year of the Rooster.

There had been hope that China would embark upon economic and legislative reforms by now, but so far the evidence is sparse. Therefore we believe that China is on an unsustainable track. Official credit growth is expected to slow down but in any case, at the current rate we believe that the credit to GDP ratio will be as high as 350% by 2020. This is less egregious than Turkey or Brazil because the majority of this debt is held domestically.

State-owned enterprise finances are improving because the authorities have been cutting supplies of steel and other basic materials by telling companies to halt production, which has resulted in a spike in prices for these materials. In the short term, we believe growth will continue at 6+% despite the declining property market. This is due to continued government spending on infrastructure, despite private investment stagnating. Also, credit growth and negative real rates keep liquidity high. Normally in this environment money would leak overseas but the authorities are working hard to plug any leaks so that they can manage the eventual economic slowdown, putting it off for at least another year.

Because of the excess domestic liquidity, a slower property market will continue to spur rotation, and retail money will go to equities, primarily A shares. The market’s valuation has gotten cheaper since last year. We are not expecting the MSCI China to re-rate upwards, despite the fact that A Shares are doing so, and therefore we think 2017 should be a calm year for the benchmark. One could make the argument for value stocks in China given they should continue to enjoy policy support, but investing based on government subsidies is a weak and shaky strategy. We expect 12% earnings growth this year and some currency depreciation, translating to a high single-digit return for the MSCI China, but a better return from A shares.

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Gary Greenberg Head of Hermes Emerging Markets Gary Greenberg joined Hermes in September 2010 in the Emerging Markets team. Previous to this, he was Managing Partner at Silkstone Capital and Muse Capital, both London-based hedge funds he co-founded and managed in 2007 and 2002, respectively. From 1999 through 2002 he was Executive Director at Goldman Sachs in New York and London, where he co-headed the Emerging Markets product for GSAM, and served on the global asset allocation and European stock selection committees. From 1998 to 1999 he was Managing Director at Van Eck Global in Hong Kong and New York, where he was the lead portfolio manager for International Equities and ran the Hong Kong Office. From 1994 through 1998 Gary was Chief Investment Officer at Peregrine Asset Management in Hong Kong, managing and supervising global and regional equity, plus fixed income funds. In the early years of his career he was a Principal of Wanger Asset Management in Chicago, where he co-founded and co-managed the Acorn International Fund, which grew to $1.4 billion under his tenure. Gary holds an MBA from Thunderbird School, a BA from Carleton College and is a CFA charterholder.
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