China equities in 2024: Confidence is everything
When the market anticipates US Federal Reserve interest rate cuts in 2024, long-term institutional investors are scoping out a range of opportunities in the capital market in the new year.
However, they are not yet convinced China will be the place to be despite cheap valuations and its long-term growth potential, given the foggy path ahead.
“We are watching very closely the China A-share market. There are opportunities. But the time is not prime yet,” said a Hong Kong-based senior investment executive at a life insurance company, who asked to remain anonymous because of sensitivities around commenting on the market publicly.
“We need to see more active trading volume before we enter the market, regardless of how attractive the valuation is,” the executive told AsianInvestor.
They noted that a fundamental improvement in investor confidence is necessary before they add to positions in onshore China equities, which they believe will offer more attractive and diverse growth opportunities than Hong Kong-listed stocks.
Global asset owners mostly avoided the Chinese stock market in 2023, with pension funds and sovereign wealth funds pausing China investments, dissolving local China stock-picking teams, or shutting down China operations altogether.
“Most foreign investors are quite underweight at this point. The way that most of us are looking at China equities is more of a trading vehicle at this point,” said Thomas Taw, head of Asia Pacific iShares investment strategy at BlackRock, referring to short-term strategies.
He noted that China is in a very different business cycle at the moment, trying to deleverage the economy without putting too much fiscal or monetary stimulus into the market, which “creates an environment that is not as enticing for foreign investors to move back just yet”.
BlackRock Investment Institute, the firm's proprietary research body, remains neutral on Chinese equities for 2024.
A FOGGY FUTURE
Investors need more clarity on growth estimates for the next two to five years, as well as on the outlook for the property sector for them to be able to put a risk premium on Chinese equities and trade on fundamentals, Taw noted.
“At the moment, it's quite difficult to do that,” he said at BlackRock’s 2024 outlook media briefing in Hong Kong. “They will come back at some point. I just don’t know exactly when that will be.”
Amid a sluggish economic recovery and gloomy investor sentiment both at home and abroad, Chinese equities underperformed in 2023. As of Wednesday, the CSI 300 Index slumped 13% year to date, while the S&P 500 rallied 21%, and the MSCI Emerging Markets Asia Index was up 0.6% over the same period.
“We think some fiscal support would be necessary to help create a recovery in confidence for consumers and business people on the Chinese mainland,” said Ben Powell, chief investment strategist for Asia Pacific at BlackRock Investment Institute, at the briefing.
“We need to see more fiscal support if they are to achieve something close to 5% GDP growth in 2024,” Powell said.
Tai Hui, Asia Pacific chief market strategist at JP Morgan Asset Management, noted that although there are opportunities in China in sectors like consumer discretionary, communications and technology, which have been delivering healthy earnings, other markets could offer a better risk-reward profile than China in 2024.
A-share trading is going to remain “opportunistic”, Hui said.
JP Morgan Asset Management remains neutral on Chinese equities for 2024. Hui noted that export-driven Asian emerging economies and Japan could offer better risk premiums for equity investors.
“From a long-term perspective, this is a very interesting point for the Chinese market potentially to deliver strong returns for long-term investors over the next two or three years, rather than just 2024,” Hui said, noting that sentiment could change quickly.
PROPERTY EXPECTATIONS
The Chinese equities market is policy driven and will remain that way, Hui said. The most important factor would be for the central government to implement effective policies to stimulate the property market and put the economy on a firmer growth path.
Property price expectations remain a core factor for sentiment, according to Hui. If domestic households start to see prices going up, that could potentially build a "virtuous cycle of recovery".
“We need domestic investors to feel more optimistic first, then that will convince international investors to get back to China,” said Hui, noting that China’s stock market is dominated by domestic retail investors.
He noted that US and European investors are “a bit more anxious” about investing in China, and often consider more complex factors including geopolitics, growth, and their views on domestic policies.
For investors in the emerging markets, the macro environment can play more heavily.
“They worry a little less about geopolitics or domestic policy, but more about China’s ability to get back on a steadier, more comprehensive growth path,” Hui said in a media briefing. “That will convince people in the Middle East, Southeast Asia or Latin America to get back to China.”
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The high-rate environment has been delaying Chinese companies’ public listing plans both onshore and offshore in Hong Kong or overseas.
Hui said more initial public offerings, especially by household tech names, could help drive market sentiment and performance, although that is more likely to be a play going into 2025 with rates remaining high in most of 2024, he noted.