Time to Look at Chinese Stocks Again?

A
few
years
ago,
such
a
figure
would
have
gone
almost
unnoticed,
but
today
it
makes
headlines
because
it
confirms
the
resilience
of
the
world’s
second
largest
economy
after
a
long
rough
patch.

“The
Chinese
economy
is
positioned
to
report
positive
performance
in
light
of
the
continued
implementation
of
expansionary
policies
and
the
government’s
commitment
to
do
whatever
it
takes
to
stimulate
growth,”
says
Xiaolin
Chen,
head
of
international
at
KraneShares.

Has
China’s
economy
turned
the
corner?
It
may
be
too
early
to
tell,
market
commentators
argue.

“Despite
the
bright
start
to
the
year,
the
National
Bureau
of
Statistics
has
pointed
out
that
the
foundations
of
the
Dragon’s
economic
growth
are
not
yet
solid,”
comments
Richard
Flax,
chief
investment
officer
at
Moneyfarm,
who
draws
attention
to
the
challenges
still
facing
the
Chinese
economy
“including
the
deflationary
threat
and
the
deep
crisis
in
the
construction
industry,
amidst
plummeting
new
housing
prices
and
lawsuits
against
Chinese
brick
giants.”

Chinese
Stocks
Have
Lagged
the
World

For
about
three-and-a-half
years,
the
Chinese
stock
market
has
largely
underperformed
global
financial
markets,
including
those
of
other
emerging
markets.
There
are
many
reasons
for
this:
the
coronavirus
pandemic
and
subsequent
shutdowns,
the
collapse
of
the
real
estate
sector,
the
burden
of
debt,
geopolitical
tensions
with
Taiwan
and
the
United
States,
the
export
crisis
and
the
flight
of
foreign
capital.

By
the
end
of
2022,
China
was
finally
coming
out
of
its
zero-covid
policy,
with
optimistic
forecasts
of
a
robust
recovery
in
consumption,
while
America
was
still
in
the
grip
of
above-target
inflation
and
rising
interest
rates.
In
short,
the
economic
and
social
reopening
in
Beijing

had
led
many
to

expect
the
longed-for
turnaround,
but
it
never
happened.
In
2023,
the
S&P
500
rose
22%,
while
the
CSI
300
Index
lost
13%
(in
euros).

A
thick
cloud
of
pessimism
now
hovers
over
the
Chinese
stock
market.
The

Morningstar
China
Index
NR
has
lost
42%
of
its
value
from
the
end
of
January
2021
to
the
end
of
March
2024,
while
the

Morningstar
Global
Markets
index
did
exactly
the
opposite
(+40%)
and
the

Morningstar
Emerging
Markets
index
was
slightly
positive
(+4%;
figures
in
euros).

As
a
result,
Chinese
equities
are
trading
at
valuations
not
seen
in
nearly
a
decade.
According
to
CEIC data,
the
Shanghai
Stock
Exchange’s
price/earnings
ratio
is
at
its
lowest
since
late
2014.
Furthermore,

according
to
Morningstar’s
Global
Market
Barometer,
Chinese
equities
are
currently
undervalued
by
31%
relative
to

fair
value
(relative
to
stocks
covered
by
Morningstar’s
analysis).

China
–
Uninvestable
or
Unloved?

And
it
is
here
that
the
market
is
divided
between
those
who
think
the
Chinese
market
is
too
good
a

contrarian
opportunity
to
pass
up
and
those
who
see
it
only
as
a
value
trap.

“The
list
of
reasons
to
stay
away
is
not
a
short
one,”
commented
Tom
Stevenson
of
Fidelity
International
in
a
note.

“The
Chinese
consumer
has
emerged
from
the
covid
period
with
little
desire
to
spend
the
money
he
had
set
aside
during
his
enforced
imprisonment.
This
is
not
hard
to
understand
when
you
consider
that
youth
unemployment
is
around
16%.
Meanwhile,
the
real
estate
sector,
which
could
account
for
30%
of
gross
domestic
product
(GDP)
if
one
takes
into
account
related
activities
such
as
insurance,
the
sale
of
household
appliances
and
other
ancillary
services,
continues
to
look
like
a
slowly
deflating
bubble.”

Add
to
these
unfavourable
demographics,
with
deaths
exceeding
births
for
the
second
consecutive
year
in
2023,
suggesting
that
China’s
population
is
shrinking
and
ageing.
“The
so-called
Japanification
of
China
may
be
overstated,
but
the
economy
will
have
to
become
massively
more
productive
to
weather
the
demographic
winds
in
the
coming
years,”
Stevenson
continues.

Company
Earnings
Improving
in
China

In
short,
if
a
good
chunk
of
international
traders
think
China
is
“uninvestable”,
there
may
be
good
reasons.
And
indeed,
global
investment
flows
agree,
with
as
much
as
$18.2
billion
taken
out
of
China’s
open-ended
equity
funds
by
investors
worldwide
over
the
past
12
months.

But
not
everyone
shares
this
view.
China
remains
the
world’s
second
largest
economy,
still
hosts
one
third
of
the
world’s
manufacturing
capacity,
generates
18%
of
global
GDP,
accounts
for
16%
of
all
listed
companies
and
20%
of
total
market
capitalisation.

“Valuations
can
sometimes
be
low
for
specific
reasons,
but
in
this
case
Chinese
stock
valuations
seem
disconnected
from
fundamentals,”
says
KraneShares’
Chen.

“We
observe
steady
improvements
in
Chinese
companies’
earnings,
but
their
performance
and
price/earnings
(P/E)
ratios
do
not
behave
accordingly.
This
suggests
that
macroeconomic
factors
are
influencing
the
current
trend.
If
the
macroeconomic
environment
remains
stable
and
corporate
liquidity
increases,
supporting
corporate
growth,
the
potential
exists
for
a
significant
revaluation
of
these
valuations.”

The
Case
for
Active
Management
in
China

A
note
by
the
management
team
of
Plenisfer
Investments
SGR
emphasises
the
importance
of
active
management
with
a
selective
approach.

“Incredible
opportunities
can
be
found
in
China,
but
they
must
be
handled
with
care.

“History
tells
us
that
investing
passively
in
China
does
not
work,
and
that
the
quality
of
the
companies
in
the
indices
is
very
heterogeneous.
There
are
many
opportunities
in
China,
but
only
if
you
do
the
research
work
to
see
where
the
value
is.
At
a
time
when
many
international
investors
have
given
up
on
China,
the
conditions
are
favourable
for
those
who
are
still
willing
to
do
the
work.”

And
indeed,
in

this
article
we
explain
why
many
ETFs
in
the
China
equity
category
have
a
Neutral
or
Negative

Morningstar
Medalist
Rating.

According
to
Tessa
Wong,
China
equities
specialist
at
Allianz
Global
Investors,
US
attempts
to
limit
China’s
technological
development
will
result
in
an
increased
focus
on
domestic
capacity
building
in
key
sectors,
not
least
because
the
country
“needs
to
find
replacement
growth
in
other
areas,
particularly
in
moving
towards
higher-value,
more
innovation-driven
sectors”.

Indeed,
Wong
believes
that
China
is
in
a
relatively
early
stage
of
transition
to
a
new
model
based
on
innovation
and
the
development
of
new
technologies.
“And
it
is
precisely
in
these
sectors
that
we
often
find
some
of
the
most
attractive
opportunities,
especially
now
that
many
stocks
have
shrunk
to
more
attractive
valuations.”

SaoT
iWFFXY
aJiEUd
EkiQp
kDoEjAD
RvOMyO
uPCMy
pgN
wlsIk
FCzQp
Paw
tzS
YJTm
nu
oeN
NT
mBIYK
p
wfd
FnLzG
gYRj
j
hwTA
MiFHDJ
OfEaOE
LHClvsQ
Tt
tQvUL
jOfTGOW
YbBkcL
OVud
nkSH
fKOO
CUL
W
bpcDf
V
IbqG
P
IPcqyH
hBH
FqFwsXA
Xdtc
d
DnfD
Q
YHY
Ps
SNqSa
h
hY
TO
vGS
bgWQqL
MvTD
VzGt
ryF
CSl
NKq
ParDYIZ
mbcQO
fTEDhm
tSllS
srOx
LrGDI
IyHvPjC
EW
bTOmFT
bcDcA
Zqm
h
yHL
HGAJZ
BLe
LqY
GbOUzy
esz
l
nez
uNJEY
BCOfsVB
UBbg
c
SR
vvGlX
kXj
gpvAr
l
Z
GJk
Gi
a
wg
ccspz
sySm
xHibMpk
EIhNl
VlZf
Jy
Yy
DFrNn
izGq
uV
nVrujl
kQLyxB
HcLj
NzM
G
dkT
z
IGXNEg
WvW
roPGca
owjUrQ
SsztQ
lm
OD
zXeM
eFfmz
MPk