- concerns about Chinese markets overheating are overdone -

London, 8 February 2010 – As the Chinese Year of the Tiger approaches, Baring Asset Management (Barings) believes that despite the continued expansion of the Chinese economy, China’s share prices still do not reflect their full potential. William Fong, manager of the Baring China Growth Fund, explains that Barings remains positive on the prospects for the Chinese equity market over the medium to long term despite concerns about the Chinese economy overheating.

William comments: “China has achieved outstanding economic stabilisation via government sponsored infrastructure development and the 8.7% GDP figure achieved in 2009 is testament to this.

“Looking ahead, we expect interest rates to rise in China. However, we believe concerns about an asset bubble are overdone.  New loans made in 2009 are mostly being used to fund Government and infrastructure projects, as well as to finance industrial capital spending. The suggestion that these loans are mainly being used for speculation in the equity and property markets is erroneous, in our opinion. We believe there is ample room for China to make further developments from a domestic perspective that will enable it to digest the actual emergence of non-performing loans, when they eventually occur.”

In the short term, Barings’ believes there is a risk that the government may need to take action to slow the pace of economic growth. This, coupled with the prospect of interest-rate rises to come, may curb investors’ enthusiasm in the near term, and there is therefore a risk of a period of heightened volatility in the market in the short term.

However, William expects growth in the region to continue at a fairly rapid pace through 2010, driven by investment in business assets and by rising consumer spending levels.  In this environment it is Barings’ belief that the China equity market will be led by a growth in earnings rather than liquidity.

William comments, “Globally, we expect the main driver of economic recovery to be the inventory cycle. As companies rebuild their inventories, we expect to see a pick-up in industrial production and trade. The re-balancing of growth should trigger greater final demand from customers in Asia, with other rapidly growing economies playing an important part.

“Within the China equity market, we are most positive on the outlook for consumer discretionary, financials and insurance for 2010. We expect consumer discretionary companies to benefit from increased consumer spending next year, while government policy will continue to drive more spending, both from urban and rural areas.”

Within the financials sector, Barings prefers insurers to banks, in the belief that they should benefit from rising short-term rates relative to long-term rates. Within the banking industry, Barings’ preference there is for medium-sized banks which it believes have the potential to grow earnings rapidly.

Barings remains cautious on the prospects for utilities, the telecoms sector and for consumer staples. Although the utilization rate is rising for utilities companies, Barings’ view is that they will struggle to pass on additional costs to consumers, and as such profits are unlikely to grow faster than consensus. Increasing competition is the main challenge for telecoms companies. This is already starting to squeeze the profit margin, and Barings expects this to remain a headwind for companies in the sector through 2010.

William comments: “In China, and across the rapidly growing countries in Asia generally, investors should expect a “V”-shaped recovery where the pace of activity picks up again relatively rapidly. In the US and Continental Europe, the shape is likely to be closer to a “U”, with slow growth until recovery begins. Japan is likely to continue with an “L”-shaped profile, where there is little sign of recovery for an extended period, while the risks of a “double-dip” seem highest in the UK.

William concludes, “We believe that 2010 will be a year in which fundamental stock-picking takes over from liquidity as the primary driver of the China equity market, and one which should prove to be well suited to our investment style at Barings.”

The Baring China Growth fund launched in May 2008. It is top quartile in the IMA Asia Pacific excluding Japan sector since inception, as at 31 December 2009.  Over twelve months, the Fund has posted a return of 56.3% versus a 44.8%* return from MSCI China Index.

Barings has a 26 year track record of managing Asian equities that goes back to the launch of the Baring Hong Kong China Fund in 1982. This was the first Hong Kong China fund in the market and is one of the largest of its kind at over US$5bn (as at 31 December 2009).

*Source: Morningstar. All performance in sterling terms, on a NAV per share basis with net income reinvested, as at 31 December 2009.