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Unlike the dreaded permabulls or permabears, the best research teams are those that pinpoint both the correct entry and exit points for investors. The Asia ex-Japan fixed income strategists at Nomura appear to fit the bill – concluding that investors were too bearish on China in the second half of 2012 but correctly warning that the positive news would be short lived. In a report released Friday, the team highlighted compelling reasons to be concerned about the Chinese economy for the remainder of 2013. This also serves as a warning for Canadian investors in resource sectors.
Nomura analysts Zhiwei Zhang and Wendy Chen successfully predicted an economic upturn for China in late 2012 but have now changed course. In "Reasons not to be too bullish on China," they argue that, contrary to popular belief, 2013 will see the Chinese government adopt inflation-fighting policies that will limit GDP growth:
With slowing potential growth, a tight labour market and the prospect of surging food prices, we expect CPI inflation to rise to 3.5 per cent y-o-y in 2013 (Consensus: 3.1 per cent; 2012: 2.6 per cent), and rise to 4.2 per cent y-o-y in H2, which we expect to cause the People's Bank of China to hike interest rates twice in H2.
For Canadian investors, Nomura's predictions for the property markets are critical: "The property price rebound may force the government to tighten credit supply/M2 growth, which should also act as a drag on growth." As we have noted before, China's money supply growth is arguably the best leading indicator of domestic mining stock performance.
Mr. Zhang and Ms. Chen also believe the new government will adopt measures to curb wealth management products, a move that will potentially pay benefits in terms of credit quality over the longer term. The short term, in their estimation, is far more problematic.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB .