Something has changed in China. If the stock market of this country and the investment funds linked to it had given nothing but disappointment in the form of significant losses in the last three years, for a few months now, they have multiplied the joys, with returns of over 10% in many cases. . The Asian giant is once again in the spotlight of all international brokerage houses, whose analysts are torn between moderate optimism regarding the economic data of the country and its companies, a certain caution about the sustainability of its recovery, and FOMO syndrome. The latter is the acronym of its original expression in English: Fear of missing out. In the stock market environment, the fear of missing out; the fear that others might be taking positions in a market that could be more than profitable in the long term.
From Goldman Sachs Asset Management they remember that GDP growth “has undoubtedly been a bright spot for China”, reaching its target of 5% last year and maintaining the path in this first quarter of 2024, after increasing by 5.3 % year-on-year. At Generali Investments, they believe that it is necessary not to forget that the country continues to host a third of the world’s manufacturing capacity and that it contributes 18% of global GDP. Evelyn Huang, fund manager at Fidelity International, explains that corporate earnings remain strong; that the dynamics are positive in most sectors, except for financial services. For Allianz GI, it is also relevant that policymakers have intensified their efforts to help stabilize the real estate sector, with measures to address both lack of demand and excess supply.
But not all are positive visions, among analysts there are also many who call for caution. John Woods, head of Asia investment at Lombard Odier, believes that while it is true that GDP growth in the first three months of 2024 exceeded estimates, “the economic data published since March has been disappointing, including the decline in growth of retail sales and production. And, he adds that the real estate sector “shows few signs of vitality and continues to record falls in prices and sales volumes in the main cities.” Álvaro Antón Luna, head of Abrdn in Spain, acknowledges that, in general terms, they would like to see more concrete signs that point to a sustainable recovery of the economy. In his opinion, it is necessary to improve confidence in China and to achieve this, “substantial greater political support would be of great help, through greater fiscal spending than expected, and greater support for the real estate market.”
Geopolitical tensions
The last of the “buts” in this area comes from Axel Botte, head of market strategy at Ostrum, who believes that there is a certain return to protectionism; that current international relations are increasingly tense, both commercially and geopolitically, and that China’s excess capacity represents an existential threat to the industry of Western economies.
Aside from the macro pros and cons, there is the debate over whether Chinese stocks are expensive or cheap. In the words of Andrés Allende, manager of A&G’s Paradigma Value Catalyst fund, local equities have enormous revaluation potential, with more than a 30% discount compared to other emerging markets. Although the valuation is important, it would not be sufficient in itself, he clarifies, if it were not for the fact that many of the listed companies are “really good companies that present sustained growth in both sales and profits; well above double digits, also paying dividends.”
Mariano Guerenstein, from J. Safra Sarasin Sustainable AM, also has no doubts that “China is cheap.” In his opinion, in the short term it is, without a doubt, an attractive market, despite its possible high volatility, but “it is even more so in the long term; that is, structurally.” In his opinion, it is not only that its economy is growing and that the Government seems determined to create favorable conditions to regain confidence, but also that international investment in this market is underweight and this “must tend to be corrected.” .
According to Fidelity, although the valuations are attractive, compared both with other regions and with the historical average of the Chinese stock market, investing in Chinese equities is not free of risks. “The real estate sector is a burden that continues to struggle to establish the new approach to growth. Furthermore, unemployment, especially among young people, is too high. Finally, deflation is a real risk in China.”
Lombard Odier even believes that a more pessimistic explanation can be given for the rally experienced in recent months. The explanation would be that “China’s economy is weakening to the point where local investors see a devaluation of the yuan as inevitable and are therefore trying to convert their local currency into Hong Kong dollars and/or gold. ”
The feeling that, after years of dry returns, the time for recovery has arrived is widespread among investment professionals despite their still cautious attitude. Primarily, in the background, for a large majority of them, the aforementioned FOMO syndrome or the fear of missing out on a manna of profitability. In the words of those responsible for Schroders, with the recent rebound in local markets, “it seems that indiscriminate capital outflows may be coming to an end and the market is finally beginning to differentiate more clearly between stronger and weaker companies, rewarding to those that can continue to offer growth and dividends for shareholders.”
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