There has been a lot of crowing ahead of the Year of the rooster

BlackRock |27-Jan-2017

Investors received a wake-up call about potential trade frictions between the US and China well before the Chinese Year of the Rooster started on 28 January.

There’s been a lot of crowing ahead of the Year of the rooster and while investors should listen, their prime focus ought to be on China’s improving growth signals and emerging opportunities in individual Chinese stocks.

It is still too early to determine the eventual effects the new US administration will have on global trade, but we believe sanctions against Chinese imports will almost certainly be too costly for the US consumers. Making smartphones more expensive, for example, will not be popular. Other practicalities suggest high tariffs are improbable too: US businesses have spent decades assembling supply chains in China. They rely on them now, and cannot recreate them quickly domestically - or perhaps even at all. A pragmatic approach to trade with China is therefore the most likely outcome, in our view, but we will be watching this area carefully.

Investors should remember that China is committed to strengthening its domestic economy and that process will continue to present opportunities to active stock pickers

The question of US trade aside, the Chinese economy enters the new year looking robust. The most recent quarterly data show that trade, producer price indices, purchasing manager indices, and most high-frequency indicators like construction activity or retail sales continue to recover, highlighting an economy gaining in strength. This improvement should persist in 2017, leading to industrial profits growth and further upside in earnings.

This should be underpinned by the ongoing structural reforms in China, which could indeed broaden in scope this year. In our view this will be crucial to ensuring that the economy not only keeps expanding but more importantly gains in quality, with greater reliance on domestic consumption and a more efficient domestic market and corporate environment. Ultimately, such trends will furthermore soften the impact of any trade tension that might be surfacing.

As investors, we should remember that China is committed to strengthening its domestic economy and seek to protect our portfolios from such international tensions and other macro issues is to focus on individual stock-picking opportunities within the expanding Chinese market.

Andrew Swan
Managing Director
Andrew Swan, Managing Director, is the Head of Asian Equities for the Fundamental Active Equity division of BlackRock's Active Equity Group.
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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of January 2017 and may change as subsequent conditions vary.

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