Performance of MSCI over 2-yrs
Source: Financial Express Analytics
Instead, third-quarter GDP growth came in at 9.6 per cent with a healthy input from investment and consumption. Urbanisation will continue to drive these two components of GDP for the foreseeable future and will present many investment opportunities on the way.
From 1976 to the present day China's urbanisation ration has risen from 15 per cent to over 45 per cent. In this time China has grown to accommodate 150 cities with 1m+ inhabitants (compared to eight in the US) and is host to five of the top ten tallest buildings in the world (compared to zero in 1980).
However, China is still an under-urbanised country (the US has an 82 per cent urbanisation rate). China's urbanisation ratio is forecast to rise to 50 per cent in 2015. This translates into a massive movement of people to areas (i.e. cities) where equity investors can more easily benefit.
One way to play urbanisation is through property. After a spectacular 2009 for house prices (and share prices), policy makers are clamping down. China bears see this as a sign of a potentially dangerous bubble.
We think this represents a fantastic long-term buying opportunity in the sector. Yes, house prices have risen very quickly but urban wages have also been growing very rapidly, thus supporting affordability. The underlying demand for housing in China's cities remains extremely strong and with household debt levels so low (20 per cent versus 85 per cent in the US), balance sheets are barely stretched. The sector is in the policy spotlight so equity investors will likely have a volatile ride but, in the space, we like Agile Property Holdings, Soho China, and BBMG.
Whilst property may be perceived as a risky play on China's urbanisation trend, rising consumption is a theme that investors are more than happy to pay up for. Rising consumption is largely driven by the differential between rural and urban incomes, so as people move to the cities they also become richer and as people get richer their consumption patterns change. This trend shows up well in the value of consumption by card transactions, which have increased 20x since 2001.
With average saving rates at 50 per cent; and continuously rising urban incomes, who would bet against it? Most China consumer plays trade at steep multiples so one has to look at the mid cap space – what about Asian Citrus?
After the Golden Week Holiday in China, at the beginning of October, the Chinese stock markets have come back to life with the CSI 300 rising 15 per cent to mid-November as fears of a hard landing have faded and investors cast their eyes forward to the next five year plan.
New policies will continue to support urbanisation and consumption growth in China to levels that the Western World can only dream of.
Edward Stileman (pictured right) is assistant portfolio manager of the Waverton Asia Pacific fund, J O Hambro Investment Management (JOHIM). The views expressed here are his own.