It's not been an easy year for China's stock markets; after adding on 5% and 7%, respectively, last year, both the Shanghai and Shenzhen composite indices are down close to 30% so far in 2018.
One major factor that has weighed have been the US-China trade tensions, with the two countries engaging in a tit-for-tat implementation of tariffs throughout 2018.
Chinese economic growth is also weaker than expected, with the 6.5% third-quarter GDP growth rate the country's slowest year-on-year performance since the first quarter of 2009.
Given the poor year-to-date performance of Chinese company shares and the slowing Chinese economy, we asked a wealth manager, a consultant and two fund managers when would be a good time for investors to start looking at putting money into Chinese equities, and what investors should look out for.
The following extracts have been edited for clarity and brevity.
Elaine Zhou, equity analyst with the chief investment office
UBS Global Wealth Management
We expect a low-teen [percentage] turn in six to 12 months but we suggest a defensive play in the near-term, given our expectations of continued market volatility amid uncertainties around policies, earnings deceleration and external headwinds. Sectors we recommend are financials and industrials. For investors who can stand short-term volatility and look for long-term growth, we still like the new economy in China, such as lending consumer names, healthcare, e-commerce and technology.
Corporate profitability remains resilient in this round of the economic downturn and should be sustained at a single-digit pace for six to 12 months. As such, we think the market should rebound amid signs of government support and thaws in trade conflicts. Value is popping up for Chinese equities given attractive valuations.
We think current valuations have more than priced in the earnings deceleration and domestic slowdown. Chinese equities are now trading below their post-global financial crisis average and close to the bottom in fiscal years 2015 and 2016, when corporate earnings growth was negative and China was facing big macro problems, with serious overcapacity, capital outflows, slowing growth and exports, over-leveraging and a weakened currency.
Sentiment is still weak among clients on Chinese equities ... Investors are still concerned about the trade war escalation as well as the macro slowdown. They have been waiting for more concrete government support to the real economy, capital market reforms as well as foreign investment. As such, more proactive government stimulus might inject confidence into the market.
Janet Li, wealth business leader, Asia
We still see Chinese equities as an attractive asset class, but then that's on a pretty long-term basis, and so I think it's hard to comment on short-term market fluctuations.
In the long term China is too big an economy to ignore and there are plenty of opportunities for investment, but right now they're being affected by many external factors ... There are complexities that will have to be worked through in order for investors to be able to have a positive investment experience.
Generally, clients are more interested in healthcare and the technology sectors. Investor sentiment is less positive than perhaps a few years back. The market has been a bit too volatile for them. But for sure, the inclusion of A-shares in the [MSCI emerging markets index] has triggered another look at the China market. ... We have received more enquiries [from clients] related to the inclusion of A-shares, which is a good sign. But in terms of actual change, the clients are more wait-and-see and observing market volatility. Generally, the appetite seems to be there, of course pending a number of issues ... including the volatility of the asset class and the ability to find good local investment managers.
Ken Wong, Asia equity portfolio specialist
Investors should gradually start to reallocate assets into China as consensus earnings growth for 2019 remains solid (MSCI China: 11%, CSI 300: 15%), while reported third-quarter earnings results were mostly in line with market expectations. In 2019, Eastspring anticipates the demand for Chinese equities will continue to grow as more Chinese A-share stocks will be incorporated into global MSCI indices with higher inclusion factors.
While we can’t be certain Chinese equity markets have bottomed, the current risk-to-reward opportunities of investing in Chinese equities are definitely looking more and more attractive. Given the CSI 300 has dropped 25% in 2018 and the MSCI China has fallen by 18%, this makes both markets the top underperformers for equities in 2018.
We believe that the low valuations coupled with low expectations for both the onshore and offshore Chinese equity markets will soon attract investors back, regardless of the geopolitical noise that has been negatively affecting overall market sentiment. Any de-escalation of trade tensions could very well be the catalyst for investors to unlock the evident value.
While clients remain somewhat cautious about investing in China, they are once again starting to look for pockets of opportunities within the market. While they remain concerned over trade tensions, investors also believe that the market’s current valuations and the potential for market mean reversions could make China a potentially good investment opportunity in 2019.
Eric Moffett, portfolio manager, Asia opportunities equity strategy
T. Rowe Price