China Outlook 2024: Policy Support, IPOs, and Optimism

China
Stocks
Have
Been
Hit
by
Downgrades

One
day
after
China’s
sovereign
downgrade,
on
Dec
7,
rating
agency
Moody’s
Investors
Service
also
revised
downward
the
ratings
for
44
Chinese
companies.

Eight
Chinese
banks,
including
Bank
of
China
(03988)
and
ICBC
(01398),
received
a
new
rating
of
‘Negative.’
E-commerce
giant
Alibaba
(09988),
internet
and
gaming
behemoth
Tencent,
and
telecom
company
China
Mobile
(00941)
were
among
the
companies
whose
credit
rating
outlook
was
downgraded.

Moody’s
said
the
reasons
for
the
downgrades
include
“broad
downside
risks
to
China’s
fiscal,
economic
and
institutional
strength”
and
“increased
risks
related
to
structurally
and
persistently
lower
medium-term
economic
growth
and
the
ongoing
downsizing
of
the
property
sector.”

Can
things
get
worse
for
China
stocks?
We
asked
three
managers
what
they
thought.

China
Stocks
Have
Not
Yet
Hit
the
Bottom

Wenchang
Ma,
portfolio
manager
at
Ninety
One,
thinks
Chinese
stocks
haven’t
seen
a
bottom,
despite
the
fact
that
valuations
have
inched
beneath
the
historical
average.
She
also
thinks
“It
will
be
unfair
to
say
that
all
the
downside
risks
are
out
of
the
door.”
She
co-manages
Bronze-rated
Ninety
One
All
China
Equity
Fund
(on
the
cheapest
share
class),
which
has
US$
452
billion
under
management.

She
highlights
two
risks:

1.
China
Property,
and

2.
Inflation

She
names
the
property
downcycle
as
one
of
the
lingering
risks,
which
poses
uncertainties
about
how
long
this
slump
is
going
to
last
and
when
the
initial
signs
of
stabilization
will
emerge.
A
further
downturn
in
the
sector
could
negatively
impact
the
overall
economy,
especially
considering
its
size.

“Although
after
the
deleveraging
process,
the
sector
now
contributes
a
lesser
proportion
of
the
overall
economy
compared
to
its
peak,
it
is
still
a
sizeable
chunk.
The
most
recent
estimate
is
pegs
the
sector
at
over
20%
contribution
to
the
Chinese
GDP,”
Ma
notes.  

Another
top-line
risk
on
Ma’s
mind
is
inflation.
Unlike
developed
markets,
Ma
is
wary
of
how
long
the
sluggish
inflationary
environment
is
plaguing
economic
growth.
She
adds:
“The
sentiment
side
for
private
entrepreneurs
for
consumers
needs
to
stabilize
and
that
needs
to
happen
as
fast
as
possible.”

Managers
Call
for
More
Policy
Support

Ma
is
calling
for
more
policy
support
such
that
the
property
woes
can
be
resolved,
or
at
least
stabilized.

“The
policy
stance
is
very
clear,
and
the
government
is
very
supportive
in
rolling
out
more
measures
to
stabilize
the
property
market.
The
reality
is
at
the
moment
inventory
levels
in
the
Chinese
property
sector
are
still
quite
high,”
says
Ma.

For
example,
she
says,
property
inventory
in
the
most
important
cities
such
as
Shanghai
is
deemed
healthier.
But
as
it
goes
down
the
city
tiers,
unsold
homes
in
the
second-tier
cities
amount
to
a
1.5-year
inventory.
Worse
still,
even
lower-tier
locations
are
sitting
on
more
than
two
years
of
inventory.
“That’s
going
to
take
some
time
to
digest.
There
is
a
need
for
more
support,”
she
adds.

Tai
Hui,
chief
market
strategist
for
APAC
at
JP
Morgan
Asset
Management,
also
echoes
the
view
that
policy
support
will
be
of
utmost
importance.
“I’m
not
expecting
a
bazooka,
but
more
policies
supporting
the
property
sector
are
going
to
be
important,”
Hui
says.

“I
know
that
the
property
sector
and
tech
don’t
seem
to
be
connected,
but
the
truth
is
the
property
sector
is
linked
to
the
broader
economy,
and
that
is
linked
back
to
the
ability
to
do
business.
So
that
to
me
is
also
an
important
signal,”
he
continues.

India
and
Japan
Benefitted
from
China’s
Weakness,
But
That
Could
Reverse

As
soon
as
the
market
is
satisfied
with
a
greater
magnitude
of
policies
and
transmission,
this
could
effectively
draw
capital
flows
back
to
Chinese
assets.

Ernest
Yeung,
who
manages
Gold-rated
T
Rowe
Price
Emerging
Markets
Discovery
Fund,
puts
a
casual
relationship
between
outflows
of
China
and
capital
influx
into
neighboring
markets.
“The
strength
of
India
and
Japan’s
equity
markets
was
a
direct
linkage
to
the
weakness
of
the
Chinese
stock
market,”
says
Yeung.
The
key
catalyst
to
reverse
that
trend
would
be
determined
by
the
policy
objectives
of
the
Chinese
government
in
the
next
12
months.

“If
[the
Beijing
government
is]
more
aggressive
in
rescuing
the
economy,
so
we
won’t
have
the
disappointment
in
growth
anymore,
then
Chinese
equity
could
recover.
When
that
recovers,
that
flow
is
going
to
reverse.
The
strength
of
India
and
Japan
may
fade
a
little
bit
while
money
could
come
back
to
China.
It
all
hinges
on
what
Beijing
does.”

Keep
an
Eye
Out
for
a
Rapid
Switch
in
Sentiment
Over
China

At
this
point,
Yeung
thinks
investors
cannot
afford
to
be
substantially
underweight
in
China.
For
this
very
exposure,
hugging
the
index
could
be
a
good
strategy.
“Our
advice
to
clients
as
well
as
in
our
portfolio
positioning
is,
if
you
have
to
be
in
China,
for
example,
China’s
a
big
part
of
our
index,
then
it
is
incorrect
to
own
zero
now,
because
valuation
and
positioning
sentiment
is
so
extreme.”

If
sufficient
policy
support
is
in
place
to
put
economic
growth
on
the
table
again,
the
sentiment
could
change
again,
and
this
swing
comes
along
quickly.
As
Chinese
stocks
start
to
see
signs
of
a
rebound,
Yeung
says:
“most
portfolios
around
the
world
that
have
sold
out
the
China
position
are
going
to
re-visit
their
portfolios.”

Echoing
the
view,
JP
Morgan
AM’s
Hui
says:
“It
is
very
difficult
to
sugarcoat
the
fact
that
sentiment
right
now
is
still
very
cautious
on
China’s
onshore
[market].
But
at
the
same
time,
sentiment
can
change
quite
quickly.”

What’s
Going
to
Happen
to
China’s
Pending
IPOs?

Other
than
policy,
Hui
adds
another
factor
to
watch
–
some
well-received
Chinese
company
IPO
listings.
He
thinks:
“We
need
domestic
investors
to
feel
more
optimistic
first.
Then,
that
will
convince
international
investors
to
get
back
into
China.”

“If
we
start
to
see
a
few
more
household
names
in
technology
start
to
be
able
to
list
either
in
the
U.S.,
in
Hong
Kong,
or
even
back
in
China,
I
think
that
again
will
be
important
because,
ultimately,
that
will
signal
that
these
companies’
managements
feel
that
they
are
getting
a
better
price
or
better
valuations
from
the
markets.
That
again
will
be
an
important
signal
of
confidence
for
broader
investors
to
get
back
into
technology.”

Focus
on
Companies
that
Contain
Costs,
and
Diversify
and
Grow

A
term
that
has
been
around
in
the
wellness
space
for
years
has
now
made
its
way
to
the
corporate
strategy
meeting
–
‘Self-Help.’

Ninety
One’s
Ma
and
Ernest
Yeung,
portfolio
manager
at
T
Rowe
Price
both
emphasized
the
importance
of
“self-help”
by
companies.
 To
explain
this,
Yeung
split
the
group
of
Chinese
technology
names
into
two
buckets
–
he
thinks
“both
buckets
are
fairly
interesting.”

1.
The
first
bucket
comprises
companies
that
have
made
inroads
into
the
international
market.
He
gave
two
examples:
e-commerce
platform
PDD
Holdings
(PDD)
and
gaming
company
NetEase
Inc
(09999,
NTES).

2.
The
second
bucket
holds
a
number
of
companies
that
are
engaged
in
streamlining
costs
to
protect
profit.
The
epitome
of
this
is
Tencent
Holdings
(00700).

Yeung
says:
“Companies
recognize
the
fact
that
the
domestic
market
is
no
longer
fast-growing.
They
are
engaging
in
a
lot
of
self-help.
For
example,
they
are
saving
on
cost,

rationalizing
their
investment,
and
selling
a
lot
of
their
non-core
investments.”

“The
investment
thesis
for
that
bucket
is
turning
from
growth
into
value.
If
they
do
the
right
self-help,
the
stocks
can
go
up
because
they
are
no
longer
driving
earnings
from
top-line
revenue,
but
they
are
driving
earnings
from
cost
saving
and
rationalizing
the
investment
portfolio.”

Also
searching
for
companies
that
are
“self-helping”,
Ma
says:
“We
would
like
to
find
companies
in
this
cyclical
inflection
environment
but
also
have
the
self-help
to
add
that
incremental
structural
growth
element
to
it.”

Managers
are
Now
Rotating
out
of
Value

Other
than
tapping
into
cheap,
cyclical
names,
Ma
says
having
a
“blended
style”
would
help
navigate
through
different
style
performance
cycles.
That
means,
on
the
portfolio
construction
level,
she
is
looking
at
individual
stocks
and
considering
their
impact
on
the
overall
style
exposure
to
the
risk
of
reward
of
the
overall
portfolio.

“Instead
of

value
being
the
only
investment
style
that
worked,
we
start
to
see
quality,
earnings
momentum,
and
price
momentum
make
a
difference
and
become
meaningful
performance
drivers
for
share
prices
and
for
stock
selections.”

As
a
stock
picker,
Ma
is
pleased
to
see
a
broadening
rally
across
a
handful
factors.
“And
we
think
very
much
this
kind
of
environment
is
likely
going
to
continue
into
2024,”
she
adds.

In
the
Ninety
One
portfolio,
another
opportunity
is
some
cyclical
growth
names.
“This
is
coming
from
the
companies
that
have
gone
through
very
long
destocking
and
earnings
downgrade
cycles
that
may
be
turning
around
at
this
point.”
Examples
include
certain
tech
industries
that
inventory
stockings
coming
to
an
end. 

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