With its meteoric rise to become the world’s second-largest economy, China is an engine of global growth and is currently expanding much faster than developed nations still struggling to recover from the recession. Although today China is facing headwinds such as nagging inflation, Putnam sees investment opportunities in many industry sectors.

Some of the key themes from the managers include:

  • In our view, many indicators point to inflation in China peaking in the summer of 2011. After that, there may be more confidence in the markets and the economy, and the central bank will likely put an end to policy tightening.
  • In the financials sector, we believe that short-term policy measures are unlikely to derail the long-term structural growth prospects of the industry or the economy as a whole. China’s banking industry offers long-term growth opportunities for investors.
  • Some aspects of inflation, such as rising wages, have helped China grow its middle class and increase demand for cars (see illustration). Another type of inflation could hinder China’s efforts to develop its domestic consumer base: food prices. The cost of food makes up about one third of China’s consumer price index.
  • The global supply of many raw materials may experience further tightening over the next two to three years. With tight supply and growing demand, the pursuit of raw materials by emerging markets, led by China, is likely to continue, driving global mergers and acquisitions in the natural resources sector.