Chinese economy may bottom out by Christmas: BNP Paribas

Worries of global economic slowdown accelerated today with Chinese GDP growth coming in at the lowest in three years. Being one of the world’s largest economies, a slowdown in China has an impact on every market, and therefore a 7.6% GDP number has a certain experts worried.

Andrew Freris of BNP Paribas Wealth Management, however, says this sluggish growth was expected. In fact, he says we may see one more quarter of 7% GDP from China, post which the economy may bottom out. “Yes the economy is slowing down, but there are also signs that there are components that are bottoming, which means that by third or very latest the fourth quarter the economy would have actually bottomed,” he told CNBC-TV18. Fresis explains that the People’s Bank of China’s monetary easing steps will percolate through the Chinese economy in say 6-9 months, and therefore the worst case scenario for a bottoming out in around Christmas, and at best the beginning of the fourth quarter. Chinese data usually has a huge impact on commodity prices because it is a big consumer of commodities for its manufacturing sector. This time round however, Fresis believes the news might already have been factored in by currency and commodity markets. Coming to the Indian equities, Fresis says that the lack of resolution of India’s fiscal situation is hanging over like a dark cloud. Furthermore, he says the RBI’s hold on interest rates will also hurt investor sentiment. “I am not surprised that investors find at best Sensex not incredibly exciting,” he said. Fresis believes Indian equity valuations are currently expensive, and says emerging markets like Philippines and Thailand will be better performers. Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video. Q: Can you take us through the impact of the Chinese GDP number, the lowest in three years, on Asian markets in general and on commodities in particular? A: There are three parts to the answer. This has been expected for a very long time; the Chinese economy has been slowing down since the first quarter of 2010. We are talking about two and half years, so I think this is no-news news. Secondly, although this is a significant slowdown, we are moving from the 8% to 7% terrain, other components such as industrial output, retail sales and fixed asset investments were effectively flat. In other words, yes the GDP is growing, but important components of the GDP are now effectively bottoming out. You asked me if this is going to have any impact on commodities. The Aussie dollar is giving me the answer, because it came down very sharply this morning and it bounced equally sharply after the Chinese results came out. This means that on balance this is not bad news. Yes the economy is slowing down, we know that, but there are also signs that there are components that are bottoming, which means that by third or very latest the fourth quarter the economy would have actually bottomed. That’s mild good news for commodities. Q: Some economists say that GDP at 7.6% is also perhaps overstated. They point to electricity consumption in China which has fallen very sharply, which may indicate a bigger fall in GDP which is being camouflaged because of political reasons. How does that square with your view of China? A: For a very long time I have been a faithful denier that all Chinese statistics are purposely distorted and that all Chinese statistics always under-represent or over-represent in the negative form. Now this business about electricity consumption would have had similar results with rail throughput, with road transport etc. I've heard it so many times in the past that I look at it with great sympathy, because it is based on actual numbers. I am not saying these people are making this up, but there is always some kind of an explanation. So the idea is to look at the regional statistics in China, because they never add up to the national; if you add the regions, instead of adding to 100% they add to 120-130%. So I want to see their production and consumption of the electricity a little bit more carefully before I jump to a conclusion that the GDP growth numbers that we have are cooked up and effectively the economy has slowed down a lot more. Let me impart something which is hugely important, because I am afraid that I am an expert on cooked up statistics. My PhD was on the Soviet Union, and these were supposed to be the masters of cooking up statistics. It is incredibly difficult to lie consistently. If the Chinese are cooking up the statistics of GDP, then they will have to cook up the statistics on fixed asset investment, on retail sales, on consumption, on industrial output and that's impossible to do. Somewhere you are going to be caught out. So there is always an inconsistency which has some reasonably good either statistical explanation or absence of very clear data as opposed to somebody taking out a rubber, rubbing out the numbers and putting something else in it. Read on for BNP Paribas' views on the Indian market.. _PAGEBREAK_ Q: When exactly do you see the Chinese economy bottoming out, if at all, and whether it already has or not? A: I think if we get one more quarter in the 7% zone, or perhaps a little bit lower than the 7.6% we have seen now, that’s perhaps the end of it. Let’s not forget that they have already started to loosen up monetary policy, and in general loosening the monetary policy may take anything to six-nine months before it begins to percolate through. So at worst Christmas, at best the beginning of the fourth quarter we will see a bottoming out of the economy. Q: What would be the more favored investment strategy for you now, because we have seen a continuous amount of data flow indicating that US is a bit sluggish along with Europe and now even China. In light of all of this data, do you think that Asian equities might see more interest in the rest of 2012 as opposed to US and Europe maybe? A: What we already know about the asset allocation of investors is that fixed income continuous to be very attractive, precisely because equities are such a pile of uncertainty. The situation is not going to get any better in the European Union in terms of GDP growth. The political and administrative system in United States is doing absolutely nothing about the fiscal policy issue and that is going to really come and bite the equity markets very, very heavily on November 8, after the new president has been elected.  So unfortunately, what would still be at the top of peoples’ mind is fixed income. Philippines and Thailand has been stellar performers; between them Philippines is up 25% YTD and Thailand is about 15% YTD in US dollar terms. That’s phenomenal performance, but of course I can’t say that you take a trillion portfolio and put it all in Thailand or in Philippines. It has to represent their market capitalization vis-à-vis the rest of the assets. So it’s a small percentage, but there are places where money can be made. Q: We have seen a move up lately on Indian equities largely because of falling crude prices or hopes of domestic reform. Do you see more juice in this rally? A: The reason why you have this uncertainty over the Indian equity market is threefold. Point number one is that valuations are still quite expensive vis-à-vis the expectations of where the market is likely to do. Second point is that the Reserve Bank of India is now on hold as far as cutting interest rates is concerned given the poor performance of inflation. Thirdly, is the combination of the other two. No resolution of the fiscal issue, no cut in interest rate and of course compound to that complete absence of any interest in initiative in terms of liberalization, in terms of opening up the economy, in terms of further deregulation. So I am not surprised that investors find at best Sensex not incredibly exciting. Q: How do you see commodities moving hereon, especially crude with all major economies slowing down considerably? A: We have to split the commodity sector in two parts, in soft and hard commodities, because their price trends are very different. In soft commodities we had very sharp increases in virtually all the key staples, in corn, in soy, in wheat, in sugar, in coffee. I don’t think this is just a temporary issue of bad weather. In all probability, we are going to see a fairly sustained increase possibly till year end. The only good news is rice is keeping up okay. So soft commodities do reflect supply conditions and in this particular case, as I said, is the stunningly poor weather in United States and also partially poor weather and some supply conditions in Brazil and in Argentina. On hard commodities, we of course we can’t blame the weather. Asia is slowing down, albeit from high levels, and of course the GDP growth rates in both United States and in the European Union are hardly exciting. So there is not going to be sufficient increases in demand out of the G3 economies and all the major Asian economies to justify sharp increases in any of the hard commodities including oil. Oil has fallen quite significantly precisely because of some supply considerations and some demand considerations. But I really can’t see more leeway than perhaps USD 100 a barrel till year end. So it is not an exciting sector, no.