Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Philip Ehrmann, manager of the Jupiter China Fund.
The Chinese economy has roared back into life. GDP growth accelerated to 8.9% year-on-year in the third quarter of 2009, thanks to the quick action taken by the Chinese government and the central bank relatively early on in the global financial crisis. Swift cuts in interest rates, a government-induced surge in bank lending and fiscal measures worth US$586bn were all aimed at keeping the country on track for several more years of strong growth.
The Chinese authorities have taken three key steps to change the economy in a remarkably short period of time. Firstly, they have boosted domestic demand for electronics and cars through government subsidies. Secondly, they have brought forward planned capital spending projects. Finally, they planned more reforms across diverse sectors, such as healthcare, education and the environment. Following its initial success, the government may now begin to step back and reduce the economic adrenalin it has been pumping into the system. However, I believe China will continue to improve its infrastructure and enhance its economic and environmental performance. That will be good news for my three stock picks.
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China's emergence as an economic power has produced some undesirable side effects. Rapid industrialisation prompted hundreds of millions of people to move from rural areas to cities. This created energy and water shortages, as well as pollution. Indeed, more than 400 cities are reported to be suffering from water shortages, exacerbated by pollution and inefficient water use. So Beijing Enterprises Holdings (HK:392) is busy expanding its water supply and sewage-treatment capacity by acquiring underperforming assets and turning them around. In addition, the company recently persuaded a local government in Hainan Province to let it operate its water project. If this goes well, the firm may win further similar projects.
One of my long-held beliefs is that China will improve its energy efficiency and reduce its adverse environmental impact by investing in new technology as it dismantles old infrastructure. This process is being driven by national and provincial governments as well as the market. China's industrialisation and infrastructure development have in the past relied on systems developed by foreign multinationals. However, this is changing and internal solutions are increasingly being used for key industries such as nuclear-power generation and transportation, where expenditure is set to balloon. Hollysys Automation Technologies (Nasdaq:HOLI) is well placed to benefit from this trend. It provides industrial control systems, railway safety and signalling systems, and automation equipment for nuclear power stations.
Lastly, China Taiping Insurance (HK:966) is a well-managed, rapidly-growing multi-line insurer. Its life assurance subsidiary, Taiping Life, is seeing the strongest premium growth within the industry, helped by its focus on higher-margin policies. The firm's non-life insurance business has recently merged with Ming An, the fifth-largest non-life insurer in Hong Kong, and some synergy effects are expected from this acquisition. The insurance industry in China is at a very early stage of development, and with its strong management team I expect China Taiping Insurance to enjoy robust business growth in the long term.
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The stocks Philip Ehrmann likes
| Beijing Enterprises | HK$52.50 | HK$25.11 | HK$48.95 |
| Hollysys Automation Tech | $13.48 | $2.00 | $12.90 |
| China Taiping Insurance | HK$30.20 | HK$8.30 | HK$30.15 |
| Row 3 - Cell 0 |
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