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Equity market outperformance lures some investors back to China

Nicki Bourlioufas  |  11 Jul 2022Text size  Decrease  Increase  |  
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The global sell-off in equity and bond markets has some investors turning to unlikely havens: Chinese equities.

A steady rally since April sees the benchmark Shanghai Shenzhen CSI 300 Index outperforming this year, down 8.7% compared to a 12.5% decline for the S&P/ASX 200 and an 18.7% for the US S&P 500. Even Hong Kong’s embattled share market is outperforming, down 8.9% as of 11 July. The mainland Chinese benchmark now outpaces its Australian and US counterparts on a one-year basis, although Hong Kong shares continue to lag.

After more than a year of volatility triggered by government crackdowns in the technology and property sectors, some fund managers believe Chinese equities are oversold. They argue stocks could also benefit from state stimulus, with the Chinese central bank cutting rates while the government mulls US$220 billion in new spending at a time when countries around the world are tightening budgets.

“We believe the market may already be in oversold territory. Timing the market is difficult, but any signs of easing related to inflation, geopolitical risk, or COVID lockdowns could help trigger the long-awaited recovery,” says Anthony Sassine, senior investment strategist with KraneShares, a China-focussed ETF provider.

“Emerging markets and China are best positioned from valuation and growth perspectives. The US is expensive and may face slowing growth, especially when compared to last year’s high base,” he says. “Those who lack exposure or are underweight their China and emerging markets exposure may find it rewarding first to start positioning for the recovery and second to invest in the long-term secular growth opportunities that are selling at a discount.”

For investors considering China, silver-rated Platinum Asia and silver-rated Fidelity Asia have a 53% and 42% exposure to the country.

Tech and consumer sectors could draw investors

KraneShare’s Sassine is most upbeat on consumer technology sectors, which represent “a massive opportunity due to favourable demographics, low internet penetration, low e-commerce penetration, increased technology adoption, and rising incomes. We believe the re-rating has been too severe, putting many high-quality and high-growth companies at a multi-year discount.”

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Another upbeat fund manager is Colin Graham, head of multi asset strategies at Robeco. With major government stimulus planned, China remains an attractive investment opportunity. Where other central banks have been raising interest rates, the People’s Bank of China (PBoC) is moving in the opposite direction and easing financial conditions, which will help the share market, says Graham.

“The Chinese government recently announced plans to increase infrastructure spending by US$45 billion, give the airline industry US$52 billion, and offer tax rebates worth US$20 billion to the middle classes. The tax rebates appear to be at the right time in the cycle to kick start growth, unlike in the US, where the government poured more money into an already overheated economy,” Graham says.

“The consumer will exit the doldrums with ‘revenge spending’, helping the domestically focussed internet and consumer stocks to recover from historically low valuation levels,” he predicts.

“Consumer and corporate balance sheets are in good shape. The excesses that we have seen in previous recessions are missing from the obvious places (except maybe government balance sheets) which leads us to think that recession risk is not elevated on a 12-month horizon,” he said.

Raj Shant, managing director or Jennison Associates has also become getting progressively more positive on the Chinese market during 2022.

“We were early to turn more wary of the Chinese equity market at the end of 2020 and through 2021: we could see that government policy and the regulatory environment was changing and becoming less favourable to some of the most profitable and fastest growing companies that had been the locomotive of the market’s progress for many years,” he says.

“However, looking through the year-end and through 2023, in a market as deeply affected by government policies as China, much will turn on what the policies of the Chinese Communist Party (CCP) turn out to be after the Party Congress.” Shant says it will be for important for investors to look for companies with great growth potential, “whose products and services are aligned with the strategic priorities of the CCP, and then to keep a watchful eye on the policy environment.”

Others fear recession for China

But not all analysts are so confident about China. In KKR’s mid-year update, Walk, Don’t Run, the private equity giant downgraded growth estimates for China and talked up the risks of investing there.

“We are now lowering our China real GDP growth estimate to 3.8% from 4.3% for 2022 and to 5.0% from 5.4% for 2023, due to longer-than-expected lockdowns and a worse-than-expected housing market correction. Our cycle indicator suggests that China’s economy has entered a period of contraction,” said Henry H McVey, head of the global macro, balance sheet and risk team at KKR.

“Despite valiant efforts by the Chinese government and though we believe that the worst of Omicron is over, the reopening process has been very slow. Meanwhile, partial lockdowns in Beijing have been in place since April 22, 2022 as a true zero-COVID status, which we continue to view as an extremely high bar, continues to elude authorities,” he said.

is a Morningstar contributor.

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