Foreign asset owners stay on China’s sidelines as growth outlook dims
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Despite attractive valuations, offshore asset owners stayed on China’s sidelines due to macro woes, unclear growth drivers, and regulatory headwinds.
Before a clearer recovery path emerges, they are in no rush to re-enter the world’s second-largest economy for the remainder of 2023, executives said.
“For China investment, there has to be regulatory certainty on entry rules, clarity on sector regulation, and also where the economy is going,” said Tuck Meng Yee, chief investment officer at Singapore-based single family office JRT Partners.
Yee noted that after China’s initial reopening stage, there is still a gap between where companies want to be valued and what investors think they are worth.
“When that gap closes is when more deals can be made,” Yee told AsianInvestor.
JRT Partners specialises in alternative investments.
“China’s opportunities in the long-term can be interesting, including agriculture, medical, and technology. Right now, people are just trying to find a clearer way forward.”
Right now, JRT Partners is sitting comfortably with cash, which can generate a 3-5% return. There is no rush for the family office to get into any new opportunities yet, but it is researching.
“Once interest rates level off, it would be time to deploy for higher returns. Even though there are paper losses in some of the portfolios, we think these investments will recover in time. Cash is sufficient for distributions and preparing for new investments,” Yee said.
Echoing Yee, the senior investment director of a large Southeast Asian state-owned investor said they won’t invest in China’s hard-hit internet sector or other sectors that don’t have a clear regulatory direction.
However, the person told AsianInvestor that China remains a very important market in their portfolios. They remain committed across sectors that don’t have regulation headwinds in both public and private markets, given the country’s long-term growth prospect.
ON THE SIDELINES
China dropped most of its Covid-19 restrictions in December 2022, pivoting to a path of normalisation.
However, after the initial recovery flush in the first quarter of 2023, the economy lost steam. In June, China slid to the brink of deflation amid weakened demand for consumer and manufactured products.
"They [offshore investors] are definitely on the sidelines,” said Chris Iggo, chair of the AXA Investment Managers Investment Institute and CIO of AXA IM core.
“Before Covid, there was a general tendency to increase exposure to China. With the Trump trade war and Covid, it made people more cautious and they either pulled back or they didn't increase exposure,” he said during AXA IM’s second-half outlook press conference recently.
“I don't think the situation has changed significantly since then.”
Covid disrupted China’s shift from an export-driven framework to a more domestic demand-driven high-quality economy that focuses on advanced technology and the service sector, Iggo noted.
“Where we are now is struggling to see where China is in that process, because one of the big victims of all that was the property market. And the property market continues to be weak, which means that it affects consumer spending and investment. I suspect that there will be additional efforts to try to revive the property market going forward,” he said.
China's National Council for Social Security Fund reportedly suggested to its asset managers that they sell some bonds, including those from riskier local government financing vehicles and private developers, after a review, Bloomberg reported on July 12.
Geopolitics is also another significant issue for foreign asset owners. China's relations with the US, Canada, Taiwan, and Russia in particular have been under scrutiny.
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The opportunities for foreign investors will depend on whether US-China relations will improve, and what happens after the US election, Iggo noted.
“So, I think for now, investors are likely to stay on the sidelines,” he said.
In addition, he noted that corporate governance is also an issue for foreign investors, who would like to see more clarity on the environment that foreign companies can operate in.
ATTRACTIVE VALUATIONS
For investors to move back to direct investments in China, Thomas Taw, head of APAC iShares investment strategy at BlackRock, noted that there needs to be more stimulus measures on the fiscal and monetary side to improve market liquidity.
“They are also just waiting to see what the actual growth differential between China — both on the macro side and on the company earnings side — will be versus Europe and the US. Then I think they will gradually start to re-enter,” Taw said during BlackRock’s recent market outlook press conference.
Singapore's GIC recently accelerated its private equity and venture capital deals in the US as China slows, Financial Times reported in June.
Despite being slightly disappointed by China’s slow rate cuts, Taw said investors are still keeping a close eye on the Chinese stock market because of its attractive valuations and the fact that Chinese assets are generally underweight in their portfolios.
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If investors see more stimulus measures in China, it will speed up their move back to Chinese equities. But even without stronger policy support, the market is still worth looking at, he said.
BlackRock overweights emerging market equities for the second half of 2023, including Chinese equities.
If investors do move back to the Chinese market directly, American depositary receipts (ADRs) will be the first step due to their accessibility and liquidity, Taw noted.
SUSTAINED GROWTH
Some investors also chose to take an indirect route to access China and any potential gains from the reopening.
The reopening triggered an initial surge of Chinese tourists to the rest of the world, which benefited some European stocks — especially the luxury goods sector — in the first half of 2023.
Foreign investors also added exposure to China’s major trading partners and beneficiaries such as Korea, Taiwan, and other emerging markets, instead of directly investing into the Chinese market.
“That's not really a sustainable trend,” AXA IM's Iggo said.
“It’s all about what happens with jobs, incomes, and consumer confidence [in China].
Another thing to watch is what Chinese companies might be investing in to sustain their growth, including whether there are continuous inputs to support them challenging the US in the technology space, or continue to develop a more broad-based service sector.
“It's not going to come from the traditional state-owned enterprises with higher levels of investment trying to take even more export market share, because I think that model is over,” Iggo said.
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Opportunities lie in Chinese companies that are domestically focused and have a consumer-led customer base.
“Over time, equity investors should be rewarded if China can get back onto a sustainable growth path,” he said.