| HONG KONG
HONG KONG China will avoid a sharp economic downturn next year, offering investors an opportunity to benefit from strong domestic consumption, particularly in the growing services sector, said Mirae Asset Global Investments.
Li Cong, who helps manage more than $5 billion as chief investment officer of Asia-Pacific investments at the South Korean asset manager, said he was optimistic that 2012 would be a better year for Chinese equities as inflation eases and economic growth remains relatively steady.
"I don't share the hard-landing concerns," said Li, adding that earnings growth at large Chinese companies would be relatively resilient to domestic tightening and weak external demand from Europe and the United States.
Earnings for constituents of the MSCI China index, a benchmark for asset managers investing in China, had grown 18-20 percent year on year, largely in line with consensus forecasts, said Li.
But a combination of Beijing's tightening policies, aimed partly at cooling the country's red-hot property sector, rising consumer prices and worries about the shadow-banking system has made Chinese shares big underperformers in Asia this year.
The Shanghai Composite Index .SSEC is down 17 percent this year, while the Chinese Enterprises Index .HSCE of top Chinese companies listed in Hong Kong, the main gateway for foreign investors to China, is down 18 percent. By contrast, the MSCI Asia Pacifc ex-Japan index .MIAPJ0000PUS is off 14.2 percent.
Sticky inflation has hobbled equity returns in Asia this year, particularly in China and India, as rising consumer prices have prevented governments from taking aggressive steps to stimulate the economy through monetary easing.
But inflation, at least in China, seemed to have peaked in mid-2011, said Li, and should return to more manageable levels next year.
China's annual inflation rate is expected to have eased sharply to 4.4 percent in November, a level that would reinforce the view that Beijing is successfully beating down consumer prices that rose at a three-year peak of 6.5 percent in July.
"I think that CPI next year will definitely come down to a more comfortable region, meaning about 3-4.5 percent, which will the give the government more flexibility to change monetary policy," said Li.
'BIGS' ON CHINA
Li, who has more than a decade of experience investing in Chinese markets, has dubbed his firm's investment strategy BIGS, an acronym that captures a preference for branded consumer goods, information technology, green energy and services.
Internet-related sectors in China are a favored pick for Li since they overlap three of those themes.
The number of smart-phone users in China was likely to surpass PC users next year said Li, with smart-phone sales expected to total 120-140 million units compared with 100 million personal computers.
"That's a phenomenal change for China and that's why we like the whole mobile internet value chain," said Li, adding that everyone from operators, equipment providers and software developers would benefit.
Clean energy was another area that would reward investors, said Li, largely because of the Chinese government's investment plans for the sector.
"At the moment we are particularly interested in natural gas plays followed by nuclear," said Li, adding that he expected China to resume its nuclear power program next year after the March earthquake in Japan.
The consumer discretionary was the biggest sector allocation in Mirae's China Sector Leader equity fund at the end of September this year while natural gas explorer Kunlun Energy Co Ltd (0135.HK) was listed at the fund's top holding.
In the firm's Asia-Pacifc fund, China was the top country allocation ahead of Australia while insurance heavyweight Ping An Insurance (Group) Co of China Ltd (2318.HK)(601318.SS), online search company Baidu Inc (BIDU.O) and brewer China Resources Enterprise Ltd (0291.HK) were among the top holdings.
(Editing by Chris Lewis)