Whether China is investable has become “the most pertinent question” for investors around the world, according to Gary Monaghan, investment director for Asian equities at Fidelity.
On a recent episode of the Relative Return podcast, Mr Monaghan noted that uncertainty about China’s investment prospects has not been helped by the recent stream of negative news.
“The mainstream media doesn’t help. Because every news story you see and hear will be negative and it obviously plants those negative seeds. But the reality is that yes, the economy is not going fantastically well. There are some real bumps along the road at the moment,” Mr Monaghan said.
“Property sector, maybe the expectations of consumer growth post-COVID reopening haven’t sort of blossomed in the way that many had hoped. But at the same time, we’re investing in stocks, right? And yes, the economy, you want things to go well. Of course you do. But at the same time, there’s always a price of a stock and the negative news we’re seeing from a macro perspective certainly weighed on the valuations of stocks across China’s market with some significant derating.”
While some of that derating is valid in certain areas of the market, Mr Monaghan explained that “it’s like throwing the baby out with the bathwater”.
“Everything’s been indiscriminately sold off and so there are opportunities to make some good money and we’re getting companies that are coming out with decent numbers, which, if you’re reading just the news, you’d think it’s impossible to do,” he said.
Moreover, he drew attention to the investment opportunities presented by the country’s scale both from a geographical and a demographic perspective.
“There’s over 4,000 listed companies and we only have to own a handful, and so we can do our due diligence and we can basically wear out the rubber on our soles, and get out there and look for stocks,” Mr Monaghan explained.
“We can find investment opportunities, and we do continue to find investment opportunities. But you do have to be selective, but that’s always been the case, and we’ve always stood by that in terms of our investment philosophy.”
India, a market darling
Elsewhere in Asia, Mr Monaghan noted that India has emerged as a “bit of a market darling” in the region, given its young and growing population, as well as its growth potential.
“It’s [India] at this really interesting juncture where you’ve got this quite clear opportunity for economic growth, and the government is providing support and policy to develop that economic potential as well,” he said.
“As this young nation grows, you’re going to get the emerging middle class and all the trappings that come with that in terms of consumption.”
But Mr Monaghan pointed out that this is actually not new news to the market, with India now moving towards becoming quite expensive.
“We’re now at a bit of a juncture where the Indian market is quite expensive,” he argued.
While acknowledging that price to earnings (PE) ratios are not always the best valuation metric to use, he said that, on a PE basis, the Indian market is double that of China.
“The market sentiment towards India is very hyped up and excited. The valuations reflect that, so therefore, we actually find that risk reward in India is actually probably more skewed to the downside,” Mr Monaghan continued.
“In order to justify these valuations, you’ve got to continue growing margins and continue growing revenues at the rate that they’ve been growing in the last few years. That’s hard to do and so, therefore, you could end up with a bit more disappointment, which could drive some derating in the market. For us, we’re underweight India.”
As a result of these valuations being “quite hard to stomach”, Mr Monaghan indicated that Fidelity was sitting on the sidelines and waiting for a better potential entry point.
