(November 14, 2012) — Political changes in one of the world’s largest economies could shake up the performance of some assets held in institutional portfolios, analysts at Societe Generale have warned.
This week, the Communist Party of China is set to confirm its new leadership – the outgoing President Hu Jintao has said the congress had “replaced older leaders with younger ones.” The process, which happens every ten years, will see new leaders face the relative slowdown in the country’s economy, which had become a point of concern in financial markets earlier this year.
Over the 10-year tenure of the previous leadership, China achieved GDP growth of over 10%, on average, each year while maintaining low interest rates. Analysts at Societe Generale said this environment had changed and the new leadership needed a new growth model.
Analysts said: “Reforms to rebalance the Chinese economy from an investment-led exporting model towards consumption should contribute to a moderate rise in commodity prices in the mid-term, in the absence of massive investment stimulus measures.”
They added that as China has become the main importer for many commodities, the country remained the most significant pricing factor in numerous commodities markets.
A survey by Bank of America Merrill Lynch this week showed investors were concerned about this asset class and had slightly reduced their holding over the past month.
Outside of commodities and other exports and output, the Chinese consumer could also be a powerful stimulant to equities markets.
Societe Generale analysts said: “Provided that new Chinese leaders implement the necessary reforms to boost household consumption, the consumer discretionary sector should continue to catch up in China.”
However, the French bank’s team cautioned investors against Chinese banking stocks as the sector faced downside risk due its exposure to potential deterioration in property prices.
The team added that the outgoing Chinese president had said the nation should seek to double economic growth and per-capita income for both rural and urban populations by 2020, from where it had been in 2010.
A problem the new leadership is likely to have to face, according to the Societe Generale team, is a growing feeling of inequality and corruption in the country that has already led to significant unrest.
The new leadership is to be unveiled tomorrow.