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10/20/2015

Not game over for China


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Chess
If popularity has its price, then major investors in China are now paying those consequences. Chinese stock markets have taken a plunge and continue to face a roller-coaster path of sorts. There’s no telling how long the ride is or what turns lie ahead, which means investors have been increasingly concerned over the uncertainty.

But it’s not the time to panic. It never really is. The foundation of investing isn’t and never was based on making flash gains. It’s always been about making strategic decisions for a potential haul in the long term.

We still believe in China’s potential because many companies still have attractive long-term growth prospects, in our opinion. The challenge for us as stock pickers, of course, is what to buy.

What’s complicated about investing in Chinese companies is how tied the corporate market is to the government. Without there being a solid and separate corporate governance structure, it’s never easy for investors to know what the Chinese hand of government will do next. It’s already unpredictable in developed economies. Imagine how much more challenging it can be for investors in China.

Especially when it comes to the protection of minority shareholders, who have less say than majority owners in company matters, it can be a hazardous path to take. But let’s take a moment to look at things in perspective.

Hazards are everywhere. On the golf course, on the road, on the construction site. That hasn’t stopped anyone from playing golf, driving, or building skyscrapers. It’s about proceeding with caution, and the rewards can be worth the risk. 

We believe in looking for companies with strong cash flow and sustainable business structures, or moats. Moats are simple businesses that have distinct barriers to competitor entry, among other potential attributes. Seek out companies with better than average governance standards, or ones that show progress in these standards.

China is no seasoned pro when it comes to asset classes. But neither are its Asian neighbors. That doesn’t mean they won’t become pros. It means that when you want amateurs to play in the big leagues, then you can’t necessarily expect them to do so right away. You have to be willing to go along for the ride. But remember, proceed with caution and do your due diligence. The current turbulence of the equity market is a prime example of how relatively immature the market is (not to mention the risk of government intervention). Stay selective.

-Donald Amstad is the Business Development Director - Fixed Income at Aberdeen Asset Management Asia Limited.

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