Market Views: Will China equities climb post Politburo meeting?
China’s latest economic meeting held by the Communist Party’s top leadership recently acknowledged the disappointing economic data and set a pro-growth tone to revive the recovery post reopening.
The policy announcement, together with other pledges released around the meeting, hit almost every keyword that the market cared about – fiscal and monetary support, private economy, domestic consumption, property, counter-cyclical measures, etc.
Interestingly, on the property sector, the long-held statement of “houses are for living in, not for speculation” was removed, followed by further loosening of restrictions on home purchasing.
The markets have reacted positively since the meeting on July 24. The onshore CSI 300 Index rallied 5.2% as of August 3. The offshore markets, although still posed gains, were losing steam with the jump narrowing to 4% for Hang Seng Index and 2.2% for S&P China Select ADR Index.
What people expect to see is more concrete measures to implement the policy direction set out by the Politburo meeting, and whether they are effective in jumpstarting the sluggish growth so far.
AsianInvestor asked fund houses whether they see buying opportunities for long-term investors in the Chinese stock market in the second half, and where to find them.
The following responses have been edited for clarity and brevity.
June Chua, co-head, Asian equities
Lombard Odier Investment Managers
Trying to predict “what, when or if” on China’s policy stimulus is no easy task, as proven that even the timing of the Politburo meeting last month was held earlier than expected. Post the meeting, there were some surprises from the read-outs.
Overall, there were positive tones on supporting consumption, property, private businesses and a plan to resolve local government debt. The surprise was the point on resolving local government debt. Investors felt that for local government to improve their debt situation it would mean raising revenue, possibly through more property easing amidst a stronger capital market.
Since the initial readout, there has been non-stop verbal support for the economy but stopping short of a “wow” factor policy stimulus. We believe many investors are still in the “wait and see” mode for concrete policy details.
However, we have a constructive view on Chinese equities and believe that investors should not just focus on “what, when or if” of policy stimulus, instead to be focused on fundamentals of the Chinese companies are that proving to be future leaders in their sectors. Despite a lacklustre overall market performance, there have been Chinese companies that had gained positively year to date, not underperforming their global peers. We find these companies mostly in the mid-cap space where their business models are less affected by policies.
Apart from a bottom-up approach, the top-down macro is also beginning to stack up quite nicely with a potential peaking of US interest rates. Chinese equities’ valuations are also extremely supportive, and we think that with a little bit of positive news, the overall sentiment will improve.
Aninda Mitra, head of Asia macro and investment strategy
BNY Mellon Investment Management
China’s Politburo meetings were an exercise in signaling countercyclical measures, and a pull-back from damagingly restrictive regulations, but it is not obvious that these efforts will drive a decisive or imminent upturn in economic activity.
Nevertheless, the announcements so far are important for limiting a further slide in business and consumer confidence and safeguarding the 5% yearly growth target for 2023.
More specifically, a slew of modest stimulus measures is being considered. Further incremental monetary easing seems to be on the cards, modest quasi-fiscal or credit initiatives, and targeted spending, can be sped up – all these measures should underscore the resolve of the authorities to not let the growth target slip.
But we doubt if the authorities will embark on large-scale or untargeted stimulus. This is because concerns around debt and a strategic focus on forging a strong national balance sheet have risen.
A big-bang stimulus, now, could also wear down medium-term policy space. As such, we are more likely to get additional rounds of regulatory and stimulus measures in the last quarter –at the yearend Politburo meetings, or at the third Plenum—which will set the stage for a credible growth target for 2024.
In this macro backdrop, we stay neutral on China’s equity market (China MSCI) – which rallied strongly in July but remains too cheap to short and still rather weak to go long.
A more sustained equity market upturn will need a follow-through of further stimulus via fiscal or monetary channels to shore up activity relative to expectations or bring economy-wide deflation to an early end –both of which would boost corporates’ earnings and pricing power.
Perceived macro risk reduction, following the Politburo’s announcement, has also supported the Renminbi and allowed its re-convergence to fair value which we estimate, for now, to be in the 7.00 to 7.20 per US dollar area.
Joanna Shen, emerging markets and Asia Pacific equities investment specialist
JP Morgan Asset Management
Equity investors are encouraged to see the Chinese government’s acknowledgement of urgent challenges on key economic issues, namely oversupply of housing, local government funding vehicle (LGFV) issues and rising youth unemployment.
The latest stimulus measures might boost market sentiment in the short term. That said, it is still too early to call for a sustainable rally in the near term until we see more details on the execution. We shall watch out for how the policy direction will be turned into reality via the announcements of specific measures in the coming weeks and months.
All in all, we will see a lower probability of a “bazooka-like” stimulus this year compared to previous decades. Our China strategies maintain overweight in secular growth areas such as carbon neutrality (e.g. solar), technology (e.g. internet/import substitution/advanced manufacturing) and consumption, while we remain underweight areas such as materials, financials and energy.
Sarah Lien, senior product specialist
Allianz Global Investors
In addition to the rhetoric, we see some softening of direct Sino-US tensions, with more face-to-face exchanges being reported between the two countries in recent weeks. Another important development has been more accommodating tones from the top leadership towards private and internet companies, and we believe this will help rekindle animal spirits among households and corporates.
Notwithstanding such encouraging signals, the economic recovery will probably not progress in a straight line. There will likely be continued equity market volatility, but the recovery trend should incrementally improve as more concrete government support measures unfold. The formulation and implementation of effective policy measures should result in significant improvements in market confidence, in our view.
We continue to focus on areas of the market where we find structural growth tailwinds. Based on recent developments, it would not surprise us to see more supportive and targeted policies introduced towards innovative segments like electric vehicles (EVs), artificial intelligence (AI), digitalisation, industrial upgrading, and automation/robotics.
Nicholas Chui, senior vice president, portfolio manager
Franklin Templeton Emerging Markets Equity
The recent Politburo meeting reaffirms that firstly, the economy matters, and this belief starts from the top. Secondly, the meeting highlighted the areas that will be addressed: the property sector and local government debt. This process will lay the foundations for future growth.
The recognition of the private sector is important given the crucial role the sector has in employment and innovation.
At the same time, capital markets form a pivotal role in wealth creation in the economy. The multiplier effect that stems from this should not be underestimated.
The follow-through actions post the Politburo meeting are important. These have started to happen with local governments singing the same tune as the Politburo. Therefore, we are encouraged by the higher probability of policy efficacy and timeliness, which should help restore private sector confidence and consumption.
Whilst the overall direction of travel remains unchanged, any recovery will not happen in a straight line. Investors need to take a long-term view, with volatility creating investment opportunities. Franklin Templeton is focused on the medium to longer-term themes that are unique to China, including consumption and sustainable growth, while paying close attention to market valuations, which are currently attractive.
Michele Barlow, head of investment strategy and research, Asia Pacific
State Street Global Advisors
China’s Politburo meeting was seen as more dovish than expected. In particular, a softening in the tone regarding property policy was positively received.
While policymakers noted that there is some downward pressure on economic growth due to weak domestic demand, they did indicate that they believe the current downturn is temporary. They pledged to better use aggregate and structural policy tools indicating there is potential room for further reserve requirement ratio (RRR) and interest rate cuts.
A couple of third-party surveys are indicating that investor positioning in Chinese equities is very light and economic surprises may be bottoming as consensus forecasts for economic growth have been downgraded quite substantially. All of which bodes well for a continued recovery in stocks.
However, we believe policymakers are unlikely to do more than is necessary to support economic growth at “around 5%” so the durability of the recovery will very much depend on whether they do enough to shore up demand, and confidence in the sustainability of the recovery.
Alec Jin, investment director of Asian equities
abrdn
We would expect targeted measures that can boost consumer income and demand in sectors like autos, electronics, and household products. We believe consumer sentiment will meaningfully improve once income prospects get better.
With or without the stimulus pledge we remain sanguine about the domestic consumption recovery story in the near term. Valuations are also at extremely undemanding levels, which represents opportunities for long-term investors like us to find quality assets at attractive prices.
We are seeing cheap valuations in certain consumer-related companies. This represents a ripe opportunity to get into the China market before the sustained recovery momentum takes off.
Over the longer term, we believe China will continue to have an outsized presence in the global economy, accounting for at least a third of global growth, and the investment opportunities remain bright.
There is a concentrated push from China to build out critical domestic sectors to attain self-sufficiency. We look for high-quality companies across the five themes – aspiration, digitalisation, going green, health and wealth – where we find the most compelling opportunities.
Caroline Maurer, head of China and specialised Asia equities
HSBC Asset Management
The low valuation of Chinese stock market, especially against other developed markets and other countries in Asia, has priced in a relatively pessimistic outlook following a slower recovery. We believe the tail risk of significant macro slowdown and financial system risk has been lowered after the Politburo meeting.
The MSCI China Index is now trading at 11.0x 1-year forward P/E, around 0.4 standard deviation below its 10-year average. Foreign investors may currently be too bearish on the China economy and have priced in too much risk or downside. A pro-growth policy orientation is one of the key anchors to re-rating opportunities in Chinese equities.
Policy implementation, how much and how sustainable they would retrieve consumers’ and homebuyers’ sentiment are needed to be observed.
We may still see some short-term volatilities, as we expect the economic activities data in the next two months would still be weak given concerns around the increasing youth unemployment rate, weakening property market momentum and geopolitical tension.
We think more detailed and all-rounded policy easing measures across cities are needed to fully stabilise the property sector and prevent the risk of a “double-dip”, particularly in light of a lack of meaningful improvement in the private developers’ liquidity situation and more defaults from several issuers recently.
We believe improving homebuyers’ sentiment, which likely requires better income, jobs and economic outlooks, is critical to a sustained recovery in property sales.