“China has been a real surprise,” said Taylor, adding that economists have recently become more confident. “Most investment banks have upgraded their GDP forecast in the last month.”
Taylor listed several factors that contribute to his rosy outlook on the Chinese economy. Most prominently, property prices are going to rise by 5-8%, he estimated. Unlike in 2016, when property price growth didn’t translate into much sales and investment activity, in 2017 the price growth is likely to do so, he argued. This in turn will benefit the broader economy, in particular boosting local tax revenues.
Further factors include a pick-up in China’s industrial production, steady but better-targeted investment in infrastructure, real interest rates near zero that are likely to stay low, and the stability of China’s currency.
“We now forecast 7.1 [renminbi to the dollar] by March 2018,” said Taylor. While weaker than the current rate of 6.9, it represents a downward (toward a stronger renminbi) revision of an earlier forecast of 7.3.
Although the US dollar will be strong with respect to European currencies, it is not likely to show similar strength to emerging market currencies, predicted Taylor. Also, China’s strong capital controls aiming to stem currency outflows, are going to have a currency strengthening effect.
While industrial production is picking up, infrastructure investment is holding steady, close to 14% of GDP. But investment is much more targeted than a few years ago, Taylor said.
Another sign of health in China’s economy is visible in its import growth patterns, in particular from Korea. “A lot of the [increase] in imports from Korea is for domestic use in China,” Taylor said. “The first quarter has been particularly good for consumer goods.”
Various investment professionals have been warming to China. Matthews Asia’s Andy Rothman, for example, sees mainly positives in China. Fidelity is also optimistic on China this year.
Global perspective
Taylor said the first quarter has brought a little more certainty around politics, particularly in the EU, but still a lot of questions remain around US policy.
In a world inundated with debt, interest rates are not likely to rise fast, he believes. There are reasons to be bullish despite anti-globalisation rhetoric, in particular as global growth appears healthy.
In this climate Taylor prefers equities to bonds, which are still expensive.
International equities will outperform US stocks, he believes. Within fixed income, with rates going up, credit is likely to outperform sovereign bonds, and investors should look at short duration.
Taylor is also bullish on the US dollar, predicting parity with the euro by the end of the year.
