Recent decisions by the Chinese central bank indicate the economy could be moving in the right direction while the market presents a case for value plays, according to professionals.
In the last 12 months, China’s SSE Composite Index has fallen some 8.6 per cent while the S&P China 500 dipped over 18 per cent as at 26 February 2024.
Speaking at VanEck’s annual China Investor Symposium, Carlos Diez, China new economy expert and chief executive of research house MarketGrader, posited that it is hard to envision a situation where the Chinese market falls much further.
“Chinese equities are at peak pessimism offering significant value. China has gone from being the world’s best growth opportunity for many years to being a value play and that requires, in our view, a focus on company quality,” Mr Diez explained.
Challenging the rhetoric that China was in secular decline, he noted that the economy is “still getting rich” and “hasn’t completed the cycle of becoming a developed economy”.
“There has been a steady climb in per capita disposable income, growing by 27.5 per cent from 2019 through the end of last year. So the consumer is in relatively good shape,” he said.
“Similarly, since 2019, Chinese households have increased their savings by almost $US8 trillion which is equivalent to 83 per cent of the value of China’s share market today. That tells you that there’s a lot of consumer firepower at hand that eventually might find itself in the stock market.”
Natalie Gurushina, chief economist, emerging markets at VanEck, believes recent monetary policy decisions are moving the economy in the right direction.
People’s Bank of China recently made several small cuts to the medium lending facility rate, she said, along with more aggressive cuts in the reserve requirements for banks which were followed by the largest ever cut in the five-year loan prime rate, which is a benchmark for mortgages.
“While this is not a game changer, I think this is a move in the right direction. There are very good reasons why China’s monetary easing should continue, even though China’s nominal interest rates do not look particularly high,” Ms Gurushina said.
Additionally, although US-China tensions continue to play on investors’ minds, she believes geopolitics doesn’t necessarily equal a negative outcome for the Chinese economy.
“China’s geopolitical clout and the internalisation of the renminbi means there is more demand for the currency, especially from fellow emerging markets,” Ms Gurushina explained, adding that a Trump win, however, could likely result in increased tariffs that would add pressure to the Chinese economy.
VanEck portfolio manager Alice Shen posited that the quality buys investors might be seeking in China are likely to be found in the technology, healthcare, consumer discretionary and consumer staples sectors, which make up China’s new economy.
Particularly, Ms Shen noted, opportunities in the country’s healthcare sector, given the Healthy China 2030 initiative which has placed health and development high on the government’s agenda since it was announced in 2016.
“If we look at the past 10 years, the total health expenditure increased from just over a thousand renminbi per capita in 2008 to over 4,700 renminbi in 2019, an increase of over 330 per cent,” she explained.
“As China improves the social safety net and its capital markets, the healthcare sector is expected to grow quite strongly, and we think that the overall expenditure into the healthcare sector will continue to grow as well.”
Attractive valuations
In its latest outlook, Platinum Asset Management observed international investors had been “spooked” by the poor economic backdrop and geopolitical tensions in China.
Clay Smolinski, co-chief investment officer at Platinum, agreed it was typically “uncomfortable” in these situations as an investor, however, valuations remained attractive.
“Whether it’s buying travel stocks in the middle of COVID or investing during the Global Financial Crisis (GFC), you’re dealing with a market where fear has taken over from fundamentals. As a value-oriented investment manager, we must look past that fear in search of opportunities,” he said.
Since January 2023, the MSCI China Price to Earnings (P/E) ratio had declined to around 10 times while the SENSEX (India), S&P500, and the Topix (Japan) had all re-rated upwards, the asset manager said, and the Indian market is now twice as expensive as the Chinese market.
Similarly, Ox Capital Management suggested the Chinese economy “will find its footing” in 2024 while equities are presently trading at “mouth-watering attractive levels”.
“The current set-up in China reminds us of the GFC in 2008–09 when the US financial markets were under tremendous pressure,” it stated.
It saw an “amazing” long-term opportunity to build positions in China, akin to the way quality companies like Google, Amazon, and Microsoft were quality, long-term buys during the GFC.
“Valuations for Chinese equities are at depressed levels, and at a time when government authorities are dedicated to restoring confidence and reinvigorating the economy,” it said.
“Stocks like Kuaishou, Anta, and Tencent are at multi-year low multiples with sustainable earnings growth outlooks. Quality businesses will continue to grow and become champion businesses in coming years. Now is the time to invest and take advantage of the very attractive valuations.”
Addressing naysayers, the firm added that the Chinese property market is not behaving like the US property crisis in the GFC.
“While we can point to multiple underlying causes leading up to 2007 (cheap debt, capital and credit availability, poor lending practices, financial engineering, deregulation, etc), the financial crisis resulted in gargantuan losses. Excess supply in housing, rapid house price declines, restrictive lending, and foreclosures of homes reduced cash flows to financial institutions. Ultimately, these developments led to financial contagion in the banking system,” Ox Capital explained.
“Even after three years of property market downturn in the Chinese property sector and property developer defaults, we have not seen significant stress in the Chinese banking system.”
