JEDDAH: Investors in the emerging markets should focus on local currency bond markets, and in particular, those offering high potential for currency appreciation, in which case, the currency appreciation will reduce the impact of changing interest rates, Khurram Jafree, head of Investment Advisory MENA, Barclays Wealth, said in a Global Economic Outlook report. He noted that equities, inflation and interest rate risk is more advanced in the emerging markets, as is the business cycle more generally. "Still, we believe that the long-term strategic case, particularly China, South Korea, and Taiwan, remains attractive despite the less attractive valuations witnessed." He highlighted the case of China, noting that "the challenge there is how to avoid overheating in the light of closing output gaps and high capital outflows. Concerns about China overheating due to a tight employment situation, high urban real estate prices and rising inflation, have led to renewed scrutiny of China's growth policies, and the role of Five-Year Plans." China's GDP in the first quarter of 2011 grew at a real year-on-year rate of 9.7 percent, marginally down from 9.8 percent in the fourth quarter of 2010. For the second half of the year, "we expect further moderation in both growth and consumer price inflation, which bodes well for the medium-term economic outlook," Jafree said. Additionally, the emphasis on domestic demand and the seven key industries identified in China's 2011-2015 Plan, could spur the medium-term GDP outlook for the Chinese economy. The industries addressed are energy saving and environmental protection, alternative energy, alternative-fuel cars, advanced materials, new-generation IT, bio-technology and high-end equipment manufacturing. The government expects that the seven strategic industries will contribute approximately 8 percent and 15 per cent of GDP by 2015 and 2020 respectively. These targets are to be supported by favorable policies such as tax concessions, preferential pricing and the availability of cheap financing. Therefore, in anticipation of lower inflation rates and a successful 2011-2015 plan in place, "we maintain a constructive view of the Chinese equity market. We recommend that both short-and long-term investors accumulate Chinese stocks, especially during any market weaknesses." However, effective stock selection remains key, Jafree pointed out. Investors still need to be selective in stock-picking by identifying firms with core competencies and business/strategy execution capabilities driven by some competitive edge. Success will not necessarily be true for every company within the strategic industry or sector and so investors should build a portfolio of corporate champions that provides an effective exposure to the growth of the seven key industries when considering investing in China.
