“China is something that we feel more comfortable with after the volatility that we have seen this year,” Ho said during a media briefing in Hong Kong on Monday.
China’s earnings expectations continued to fall until the first quarter this year. However, it has since rebounded and expected to continue to drive upward in the coming year, according to Ho.
In addition, China, as well as Korea, have the most attractive price-to-earnings and price-to-book valuations in Asia ex-Japan, he added.
Risks in China include massive capital outflows and a stronger depreciation of the renminbi. Globally, they include a US recession and a Eurozone slowdown – all of which would result to a global growth of just 2% or below.
The firm expects downside risk scenarios for 2017 to have only a 15% chance of playing out.
Amundi’s central case scenario, which has 70% chance of happening, includes a world GDP growth of around 3% and a stabilised Chinese economy, Ho said.
Drivers of China’s economy
Ho is overweight Chinese equities given the country’s positive macro outlook. In terms of sectors, He is positive on cyclical sectors, such as industrials, energy and materials – both in China and globally. New economy sectors, particularly ecommerce, are also attractive.
He cited different factors driving the Chinese economy, which include disposable income, the opportunities in the service industry and the growing relevance of e-commerce.
Currently, emerging markets represent around 80% of the world population, according to Ho.
Data from the IMF shows that emerging markets, combined with developing economies, account for 85% of the global population of 6 billion.
In Asia alone, there are currently around 525 million people that are in the middle class, according to an EY study. Over the next two decades, Asia’s middle class is expected to expand by another three billion, almost exclusively from emerging markets.
“[Population] is a very important component that will drive disposable income,” Ho said.
The structural shift to a services based economy is also creating opportunity. Although China’s services sector falls behind some of the emerging markets, it has been growing as a percentage of GDP.
Other drivers in China are infrastructure spending and technology.
China’s internet penetration rate is relatively low, with only around 700 million users and e-commerce is on a growth path. Online retail sales growth over the past three years has been growing at around 40% per annum, which compares to the growth rate in retail sales of around 11%-12%, according to Ho.
“The online shopper has already outgrown the traditional shopping channels, and this is one of the key drivers driving e-commerce,” he said.
Asset allocation
Amundi’s Asia and emerging market funds, such as the Equity Asia ex-Japan Fund, Asia-Pacific Equity Dividend Fund and the Equity Emerging Focus fund, have China as their biggest exposure, at 28.45%, 20.67% and 26.28%, respectively, according to their fund factsheets.
Within the emerging markets universe, Ho is more positive on Asia compared to Latin America or emerging Europe.
“There is more political uncertainty in the other emerging markets,” he said. “Asia is a little bit more stable – the visibility is higher – so that is why overall we like Asia.”
Compared to China, India is a longer-term overweight market for Ho because of the growing outsourcing market and young population. In Southeast Asia, he is positive on the Philippines.
On the flipside, Ho is underweight Malaysia.
“Malaysia has an election next year, and there are uncertainties in elections,” he said, adding that there is also some headwind coming from oil prices as the country is a net-exporter of energy.
However, since the price of oil has been stabilising, there is a possibility that Ho may revise his position.
