China has lost some of its lustre over the last couple of years for offshore investors as slow growth, property woes and geopolitical tension have dented confidence.
The recent move by the Biden administration to limit US investment technology investments in China and a deflationary shift in the giant Asian economy probably haven’t helped sentiment much either.
But the Chinese market remains an attractive long-term destination for foreign investors, according to Jonathan Wu, Premium Asia Funds management executive director.
In NZ last month on an adviser tour, Wu said the recent geopolitical and economic difficulties in the country obscure strong fundamentals such as low debt levels, still-robust consumer spending potential and an innovative industrial sector.
He said the Chinese government has carefully managed the financial fallout from a property boom and crash that saw commercial real estate giant, Evangrande, default in 2021 followed by a debt restructure plan. Last week another China mega property developer, Country Garden, missed a debt payment that put investors further on edge.
However, Wu said the Chinese government was committed to stabilising the housing market, implementing the so-called ‘three arrows’ strategy to shore-up real estate development finances last December, for example.
The outsize influence of the Politburo governing clique on the economy also tends to weigh on investor decisions but the centralised power brings financial advantages, too.
For example, he said investors are watching closely for the next round of government stimulus given the fiscal headroom and deflationary signals in the wider China economy.
He said while many investors were expecting the stimulus to arrive earlier this year, Premium went against the consensus, tipping the easing cycle to begin later this year following the all-important ‘plenum’ – or the Communist Party gathering of top power brokers typically held seven times in between the five-yearly national congress meetings.
Wu said the Chinese share markets historically have shown the “most upside” during the third to fifth plenum phases, due to start this October.
In spite of the political nuance, he said the communist government is committed to a thriving private sector in an economy that now ranks as the second-largest in the world.
Even if economic growth is more subdued compared to the recent past, China is still expected to “lead the world out of recession” over the next few years with real GDP growth forecast to rise from 3 per cent in 2022 to about 5 per cent over the following two years, Wu said, compared to the global average of 2.4 per cent this year (rising to 2.9 per cent in 2024).
The downbeat mood on Chinese stocks has also created an “attractive” entry point for investors who believe the economic dragon will turn, he said.
Currently, the broad MSCI China index shows a price-earnings (P/E) ratio of 10.5-times against the 10-year average of 12.1-times. Stripping out the China-A, US-listed Chinese stocks (via the American depositary receipt system) and Tencent, however, the P/E ratio slides to just under six-times.
“Investors probably have a few months to consider whether to allocate to China at these sorts of attractive valuations,” Wu said.
To date, NZ retail investors have taken a cautious approach to China, probably getting some exposure via global or emerging market equities funds but at large underweights relative to the country’s representation in stock indices.
He said given the global importance of the Chinese economy investors can’t “sit on the fence” about allocations.
“There’s a three-step decision process for investors,” Wu said. “Firstly, they have to ask if they believe in the [China] story. Secondly, they should consider the diversification benefits of a stand-alone allocation to Chinese stocks, which have been uncorrelated to developed markets.
“And, finally, they should look for active managers given the potential alpha in the less efficient Chinese markets.”
The Australia-based Premium offers several equity and fixed income strategies managed by the Chinese Value Partners multi-manager firm including the Asia, Asia Income and China funds.
In NZ, Premium is represented by Heathcote Investment Partners.