Brian Jacobsen

Change is afoot in China (excerpt)

On the Trading DeskSM12-5-12
By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

While the public in the United States was focused on the once-every-four-years presidential election, people in China were watching the once-every-five-years meeting of the Chinese Communist Party’s National Party Congress. How does this leadership change affect you and your portfolio? In this excerpt of On the Trading DeskSM from Friday, November 30, 2012, emerging markets portfolio manager Derrick Irwin, CFA, offers his insights to Dr. Brian Jacobsen.

Watch the video.

How about your thoughts on this leadership change in China?
I think that we shouldn’t expect a massive change after this leadership transition. The Chinese don’t really think in terms of a mandate for change, as it were, like our politicians do. It’s really a very consensus-based process, and we would expect under any circumstances for reforms, while necessary, to move fairly slowly. With regard to the new government, as we look at the Standing Committee, I would say not terribly reform-focused folks, quite a conservative group of folks on the Standing Committee. Although probably on the margin slightly more business friendly. If you look at the composition of the group, many of them have experience in some of the coastal areas, which have seen a lot of the development in China. So I think that their inclination will be business friendly, which on the margin should be good for Chinese equities, particularly leading Chinese equities. Now, they’ve talked about the laundry list of reforms in China and during the leadership transition. But I do think it would be slow. I think some of the things that we should look out for over the next year, and then maybe implementation over the next several years, would be a fiscal and financials sector reform. One of the issues that we’ve had with China over the last decade is pretty significant imbalances in how assets have been allocated within the economy, particularly toward recent infrastructure projects that may not have a particularly high return on investment. But I think we have started to look for deregulation in the service sector, which has been quite tightly controlled.

With your expertise in emerging market equities, are there any specific sectors or industries or countries that you’re more or less interested in now?
With regard to sectors, particularly within China or in general, I think a few that stand out for us, the impetus for many investors is to look at the consumer sector as a whole, and we think you need to be careful there. The growth path for consumer companies in China so far has been highly competitive. Lots and lots of very fragmented markets. Lots of lots of small players, and probably think the consumption story in China is a good one. It will not be without stumbles and setbacks. I think you really need to focus on the leaders in these markets, and at least try to pinpoint who the leaders will be rather than viewing the consumer sector as a whole. Finally, some of the areas we’re looking at, and as we look toward financial sector reforms, which I think will be challenging, but some of the interesting ones may be insurance companies. Life insurance is a very small industry in China right now, and I think that that will probably be a structurally good growing opportunity in China as it develops.

Well, that’s all the time we have for the program today. Derrick, thank you for joining us.
Thank you.

The views expressed are as of 12-5-12 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®; Derrick Irwin, CFA; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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