Newsbox: Aviva Investors Market Comment: Moody's downgrade of China's sovereign

debt r...

AVIVA INVESTORS

MEDIENMITTEILUNG

24 May 2017


Market commentary on Moody's downgrade of China's sovereign debt rating

Photo Will Ballard (JPEG):
http://e3.marco.ch/publish/bluerobin/541_6706/Will_Ballard_Print.jpg

(London, Zürich) Will Ballard Head of Emerging Markets and Asia Pacific
Equities at Aviva Investors comments Moody's downgrade rating: 
 
"Moody's downgrade of China's sovereign debt rating today should come as
little surprise to investors, taking it to a rating that is now on par with
Fitch. S&P will probably be next. For equity investors debt ratings have no
direct read across. However, it could have knock on effects and start to turn
the spotlight on whether there are more serious issues that need to be addressed
and that could undermine investor confidence in not only debt, but also equity
markets.
 
"The first stage impact is that once the sovereign rating is downgraded, it is
likely that most Chinese banks will have to be downgraded as well. A rising cost
of funding for the banks, unless it can be passed on, results in falling net
interest margins. That in turn to the average equity investor, means lower
earnings for banks stocks. Considering international investors are already
having misgivings about investing in Chinese banks, with ICBC's H shares
trading on only 6x earnings, any fall in earnings is going to do nothing to help
confidence.
 
"The second factor worth considering is why are Moody's downgrading the
debt? Should their analysis prove correct then perhaps we are looking at a
slower path to growth for Chinese GDP. Should that be the case, then again,
future earnings of Chinese companies could be lower than investors expect. Lower
growth and lower earnings normally mean lower valuations.
 
"Is it all as bad as that? Well the first thing to say is that this downgrade
isn't unexpected. In fact the Chinese are well aware of some of the concerns
highlighted by Moody's. Xi Jinping has already called for increased action
from the government to control financial risks and improve co-ordination between
the various regulatory authorities. Valuations are also already low. The HSCEI,
which represents Chinese companies listed in Hong Kong, is one of the cheapest
equity indices. It trades on only 8.5x expected earnings, compared to the
broader MSCI Emerging Markets index on 13x. With that in mind, perhaps it's no
surprise that the index was only slightly down on this announcement."
 
 
ENDS
 
Press Contact Switzerland

 
Kirsten Duelli
Instinctif Partners
[phone]
mailto:[e-mail]

NOTES TO EDITORS
 
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Aviva Investors is the global asset management business of Aviva plc. The
business delivers investment management solutions, services and client-driven
performance to clients worldwide. Aviva Investors operates in 15 countries in
Asia Pacific, Europe, North America and the United Kingdom with assets under
management of £345 billion as at 31 December 2016.


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