The
rebound
is
not
coming.

On
the
contrary,
the
Chinese
and
Hong
Kong
stock
markets
continue
to
lose
value.
Last
week,
the
stock
markets
slumped
to
multi-year
lows.

In
fact,
confidence
in
the
world’s
second-largest
economy
is
evaporating
and
foreign
capital
is
abandoning
it,
while
the
latest
data
show
stunted
growth
and
a
growing
malaise
in
the
real
estate
sector,
at
the
centre
of
which
is

the
story
of
Evergrande
.

In
the
past
three
months,
the
Morningstar
China
Index
and
Morningstar
Hong
Kong
Index
have
lost
7%
each,
while
the
Morningstar
Global
Market
Index
has
risen
10.7%.
If
we
broaden
the
time
horizon,
things
do
not
change:
-26%
and
-27%,
respectively,
versus
+15.5%
over
the
past
year
(data
in
Euros,
as
of
January
24
2024).

“This
slowdown
is
structural
in
nature,
driven
by
a
sharp
correction
in
the
real
estate
sector
that
occurred
in
late
2021
and
is
still
ongoing,”
says
Amundi
chief
investment
officer
Vincent
Mortier.

“In
2024,
we
expect
housing
prices
in
major
cities
to
decline
more
rapidly,
particularly
as
the
supply
of
affordable
housing
increases.

“The
difficult
process
of
rebalancing
from
over-reliance
on
real
estate,
combined
with
the
start
of
debt
restructuring
by
the
local
government,
is
expected
to
put
downward
pressure
on
Chinese
growth
over
the
next
three
to
five
years.”

At
this
point,
the
question
no
longer
seems
to
be
whether
growth
will
slow
further,
but
whether
China
will
be
able
to
navigate
a
sustainable
future.
Productivity
is
at
the
heart
of
the
new
growth
model
identified
by
the
authorities,
with
a
renewed
focus
on
technology
and
energy
transition.

The
Flight
of
(Active)
Investors
From
China

The
strong
scepticism
hovering
over
the
Chinese
stock
market
is
reflected
in
the
foreign
investors’
outflows.
International
managers
have
drastically
reduced
their
exposure
to
the
country
in
recent
quarters,
contributing
to
the
index’s
decline.
Last
year,
investors
redeemed
€2.9
billion
(£2.5
billion)
from
actively
managed
China
equity
open-end
funds
domiciled
in
Europe,
marking
an
annual
organic
growth
rate
of
-6.6%.

If
we
take
only
the
exchange-traded
fund
(ETF)
universe,
however,
we
see
that
in
2023,
European-domiciled
China
equity
ETFs
grossed
€340
million,
with
an
annual
organic
growth
rate
of
6.15%.
In
three
years
(between
2021
and
2023),
ETFs
exposed
to
Chinese
equities
attracted
nearly
€4
billion
in
net
flows.

What
is
China
Doing
About
Market
Pessimism?

The
situation
has
reportedly
even
prompted
the
government
to
consider
introducing
a
¥2
trillion
(about
€260
billion),
aid
package
aimed
at
stabilising
the
stock
market
through
targeted
purchases.
The
news
was
reported
by

Bloomberg
News
,
citing
its
own
sources.

Subsequently,
the
China
Securities
Regulatory
Commission
promised
to
make
every
effort
to
make
the
capital
market
function
efficiently
by
cracking
down
on
price
manipulation
and
unusual
trading
activities.

Meanwhile,
Jack
Ma,
co-founder
and
former
chair
of
Alibaba
(BABA),
appears
to
have
bought
about
$50
million
worth
of
shares
in
the
company
in
the
last
quarter
after
retiring
from
the
public
arena
due
to
Beijing’s
2020
crackdown.
News
of
the
purchase
contributed
to
the
stock’s
rebound.

Finally,
in
an
unusual
communication
on
Wednesday,
the
People’s
Bank
of
China
anticipated
it
will
cut
the
reserve
requirement
ratio
for
banks
in
early
February
to
free
up
resources
and
support
the
economy.
The
0.5%
cut
will
provide
¥1
trillion
of
long-term
liquidity
to
the
market.

“The
mix
of
news
has
had
a
positive
effect
on
the
market
but
the
risk
is
that
it
may
be
ephemeral,”
explains
Massimo
De
Palma,
head
of
the
multi
asset
team
at
GAM
Italy.

“Too
often
hopes
have
been
dashed,
especially
in
the
recent
past,”
he
says.

“Aware
of
this,
the
central
bank,
a
few
hours
after
the
announcement,
unveiled
new
measures
to
counter
the
prolonged
difficulties
in
the
real
estate
sector,
which
over
the
years
have
weighed
on
business
investment,
undermined
job
creation
and
curbed
consumer
spending.”

In
short,
acting
effectively
and
restoring
confidence
in
the
market
seems
to
be
yet
another
gamble
by
the
Chinese
authorities.

Buy
The
China
Dip?
Only
for
Those
With
Patience

You
might
want
to
brave
the
China
dip,
but
professionals
encourage
selectivity.

“From
an
investment
perspective,
the
shift
to
a
more
sustainable
growth
model
presents
opportunities
in
the
long
run
for
Chinese
assets,
but
also
requires
more
selectivity
in
the
short
term
to
cope
with
the
economic
slowdown,”
says
Amundi’s
Mortier.

As
for
equities,
the
French
investment
house
maintains
a
positive
view.

“Valuations
are
attractive
and
the
long-term
risk/return
ratio
looks
attractive
(especially
for
the
domestic
market),
even
taking
into
account
another
wave
of
downward
earnings
revisions
in
2024,
as
consensus
earnings
expectations
are
still
too
high,”
it
says.

There
are
also
those
who
go
further
afield,
such
as
Andrew
Lapping,
chief
investment
officer
of
Ranmore
Fund
Management
(the
UK
fund
house
whose
funds
are
not
available
in
Italy).

He
says
“the
slump
presents
a
golden
opportunity
for
investors.”

“It’s
important
to
seize
opportunities
when
they
present
themselves,
but
it’s
often
difficult
because
the
crowd
is
moving
in
the
opposite
direction,”
says
Lapping.

“There
are
definitely
risks
in
China,
but
there
are
risks
everywhere,
and
it
depends
on
what’s
in
the
price.
In
the
last
year,
the
S&P
500
has
risen
more
than
20%
while
the
Hang
Seng
has
fallen
30%.
It
is
not
possible
for
the
underlying
corporate
values
to
diverge
to
such
an
extent.

“This
underperformance,
particularly
in
the
last
month,
has
given
us
the
opportunity
to
buy
high-quality,
well-capitalised
companies
at
very
low
prices.”

Whether
or
not
one
shares
Lapping’s
enthusiasm,
it
seems
at
least
logical
to
ask:
if
until
a
few
years
ago
the
investment
industry
was
telling
us
China
was
the
future,
are
we
sure
in
this
short
period
of
time
everything
has
changed?

This
is
the
same
question
Pharus’
management
team
is
asking.

“China
is
an
equity
market
with
certain
inherent
characteristics,
where
there
is
now
a
margin
of
safety
for
the
investor
that
was
not
there
two
years
ago,”
reads
a
January
25
note.

“First
of
all,
the
-45%
correction
[from
2021
to
today]
we
are
experiencing
is
a
normal
correction
China
has
experienced
every
four
years
since
2002.

“Today
we
find
ourselves
with
valuations
expressed
in
terms
of
price-to-earnings
ratio
at
9.95x,
a
level
seen
only
four
times
in
the
last
10
years.
Again,
in
2021,
when
the
investment
industry
was
positive
on
China,
the
price-to-earnings
value
had
hit
an
all-time
high
of
18x,
double
the
current
level.”

In
short,
China
has
not
changed
much;
instead,
it
is
investors’
expectations
that
have
worsened.

“At
this
time
and
at
these
valuations,
we
believe
China
can
represent
an
investment
with
a
wide
margin
of
safety,”
Pharus’
analysis
concludes.

Dedicated
China
ETFs

Most
of
the
Morningstar
Medalist
Ratings
assigned
in
this
space
are
not
positive
(Negative
or
Neutral)
and
only
one
ETF
gets
a
rating
of
Silver.
In
fact,
the
nature
of
the
indices
tracked
generally
makes
passive
replication
less
competitive
in
this
specific
category.
In
this
sense,
the
impact
of
fees
is
even
more
important.

The
MSCI
China,
for
example,
has
about
700
stocks.
Over
the
past
decade,
the
various
index
providers

and
MSCI
in
particular

have
added
Chinese
companies
listed
in
the
United
States
(November
2015)
and
began
adding
Chinese
A-shares
in
May
2018.

In
November
2019,
MSCI
completed
all
phases
of
inclusion
of
Chinese
A-shares
(with
a
20%
inclusion
factor).
As
of
the
end
of
December
2020,
the
index
excluded
Chinese
military
companies
sanctioned
under
the
U.S.
executive
order.
The
index
is
very
broad
but
may
be
too
concentrated
in
certain
sectors
(consumer
discretionary
goods)
or
in
certain
names,
such
as
Tencent
(TCEHY)
and
Alibaba.

Further
inclusion
of
Chinese
A-shares
remains
an
ongoing
topic
of
discussion.
Greater
inclusion
of
these
stocks
would
bring
advantages
(greater
market
representativeness),
but
also
disadvantages
(risk
of
front-running
by
active
managers)
to
strategies
looking
to
increase
their
holdings
in
mainland
China
stocks.

The
FTSE
China
50,
on
the
other
hand,
does
not
include
any
Chinese
companies
listed
in
New
York
or
Chinese
A-shares
listed
on
mainland
China
exchanges.
Given
the
universe
(only
Hong
Kong-listed
Chinese
companies)
and
the
selection
criteria
(limit
to
50
stocks),
this
index
has
a
very
concentrated
exposure,
with
the
top
10
names
weighing
60%
of
assets
and
strong
exposure
to
financial
stocks
relative
to
the
category
average.

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