While commentators have expressed fears that China’s economy could overheat, Baring Asset Management is of the view that such concerns are overstated and that, despite China’s rapid expansion, the country’s share prices still do not reflect their true potential.

Over the medium to long term, Barings remains positive on the prospects for the Chinese equity market, said William Fong, manager of the Baring China Growth Fund, adding that although the firm expects rising interest rates, fears of an asset bubble are not necessarily justified.

Mr Fong refutes the notion that new loans made in China in 2009 are being mainly used to fund speculation in the equity and property markets, noting that loans are mostly being used to fund government and infrastructure projects, as well as to finance industrial capital spending. Furthermore, the firm believes that when non-performing loans occur there is scope for China to digest them through domestic developments.

China’s breakneck speed of economic growth - which saw the country achieve GDP growth of 8.7 per cent last year - leads Barings to believe that the Chinese government may have to take measures to slow its pace. This, and the likelihood of interest rate rises, may dampen investors’ enthusiasm in the near term, but Mr Fong believes that Chinese growth will continue fairly rapidly this year off the back of investment in business assets and increasing consumer spending levels. Against this backdrop, Barings is of the view that the Chinese equity market will be led by a growth in earnings over liquidity.

At a global level, Barings expects that economic recovery will be driven in the main by the inventory cycle, as companies rebuilding their inventories will be accompanied by a lift in industrial production and trade. According to Mr Fong, the re-balancing of growth is likely to trigger greater final demand from Asian customers in Asia, with other rapidly growing economies playing an important part.

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While commentators have expressed fears that China’s economy could overheat, Baring Asset Management is of the view that such concerns are overstated and that, despite China’s rapid expansion, the country’s share prices still do not reflect their true potential.

Over the medium to long term, Barings remains positive on the prospects for the Chinese equity market, said William Fong, manager of the Baring China Growth Fund, adding that although the firm expects rising interest rates, fears of an asset bubble are not necessarily justified.

Mr Fong refutes the notion that new loans made in China in 2009 are being mainly used to fund speculation in the equity and property markets, noting that loans are mostly being used to fund government and infrastructure projects, as well as to finance industrial capital spending. Furthermore, the firm believes that when non-performing loans occur there is scope for China to digest them through domestic developments.

China’s breakneck speed of economic growth - which saw the country achieve GDP growth of 8.7 per cent last year - leads Barings to believe that the Chinese government may have to take measures to slow its pace. This, and the likelihood of interest rate rises, may dampen investors’ enthusiasm in the near term, but Mr Fong believes that Chinese growth will continue fairly rapidly this year off the back of investment in business assets and increasing consumer spending levels. Against this backdrop, Barings is of the view that the Chinese equity market will be led by a growth in earnings over liquidity.

At a global level, Barings expects that economic recovery will be driven in the main by the inventory cycle, as companies rebuilding their inventories will be accompanied by a lift in industrial production and trade. According to Mr Fong, the re-balancing of growth is likely to trigger greater final demand from Asian customers in Asia, with other rapidly growing economies playing an important part.

Within the Chinese equity market, this year Barings favours consumer discretionary, financials and insurance, the first being set to benefit from increased consumer spending levels and further bolstered by government policy driving spending in both urban and rural areas. With regards to banks, Barings’ preference is for medium-sized ones - which it views as able to grow their profits rapidly – but looking at the financial sector more broadly the firm prefers insurers to banks. Insurers, in Barings’ view are set to benefit from rising short-term rates relative to long-term rates.

Barings is less sanguine on the prospects for utilities, telecoms and consumer staples in 2010. While the utilisation rate for utilities companies is on the rise, Barings’ view is that profits are unlikely to outstrip consensus as firms are likely to struggle to pass on additional costs to consumers. Telecoms, meanwhile, face the challenge of increased competition which is already begin to put a squeeze on profit margins. This extra pressure is likely to remain a headwind for telecoms companies throughout this year, Barings believes.

Looking at the likely trajectory of China’s recovery, Barings predicts that that of China, as well as other rapidly growing countries, will be V-shaped, showing a relatively rapid pick-up in the pace of activity. This is in contrast to the US and Continental Europe, where the firm predicts a ‘U’-shaped recovery; Japan, where an “L”-shaped profile is expected; and the UK, where the risks of a “double-dip” seem highest.

“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,” Mr Fong concludes.

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