In this exclusive analysis, Jian Shi Cortesi, Investment Director, Fund manager of China and Asian equity funds at GAM Investments, shares some of the reasons she is positive about finding value in the world’s second largest economy
In recent months, Chinese equities have taken a hit due to weak confidence levels. The MSCI China Index is still more than 50% below the previous peak, as of the end of October this year. Investor confidence in Chinese equities is at its lowest level since the Asian Financial Crisis of 1998.
Chinese stocks have faced a tumultuous year in 2023. A property market crisis, geopolitical tensions, and a weaker Yuan prompted many investors to ditch Chinese stocks.
However, there are signs this is changing. The Chinese economy is going through a major transition. To reduce its reliance on real estate construction, the country’s economy is pivoting towards high-value-added industries. We expect this to have a positive effect on the fortunes of Chinese companies across a range of sectors.
A reminder to check out our latest podcast with Jian Shi Cortesi on IFA Magazine, which can be seen here. With her thorough understanding of Asian markets and her extensive experience of investing in them, Jian makes an excellent case why investing in China and Asia makes real sense at this stage in the cycle.
Economic tailwinds could offset real estate weakness
Given the counter-cyclical nature of Chinese policy, we believe the Chinese government will continue with supportive policies next year to stabilise property sales and support economic growth. Low inflation offers room to maintain expansionary monetary policies. Fiscal spending will also be stimulative. We believe speeding up the bankruptcy and asset liquidation processes of troubled developers will help the real estate market revert to a healthy state.
In 2024, we expect lacklustre property construction. Relocation of low-end manufacturing to countries where labour is cheaper will continue to drag on economic growth.
However, we anticipate advanced manufacturing, especially in aircraft and robotics, will be key drivers for Chinese economic growth.
Further impetus to the economy is likely to come from new energy equipment, for example the solar supply chain. China is estimated to become the largest car exporter in 2023, thanks to growth in the electric vehicle space – which should in turn lend support to the batteries market.
Consumption-focused sectors, such as travel, will also be positive for the economy. Technology self-based reliance industries, such as artificial intelligence (AI) and semiconductors, along with pharma, biotech and medical devices, should fuel growth too.
Signs of a turnaround in Chinese equities performance
The MSCI China Index has underperformed dramatically relative to the MSCI World in the past three years, due to lower valuations. The price of sales of the MSCI China Index relative to MSCI World was approximately 1.1 a decade ago. Today that ratio is approximately 0.5, showing how much China has derated. The price-to-book ratio of the MSCI China is also near historic lows.
The MSCI China Index has delivered little performance over the last 19 years, despite both China’s economy and corporate earnings having grown significantly over this period. For investors like us who look to buy good companies at attractive prices, we find the current market environment an exciting time with ample stock picking opportunities. The sectors and companies most affected by investor misconceptions also provide the most interesting opportunities.
Many companies in our portfolio have delivered robust earnings results. While some of these results were ignored by the market and are yet to be reflected in stock prices, some of these stocks, namely education companies, have begun responding positively to improved earnings. Many companies are also sitting on a large amount of cash and have announced share buyback plans. Large cash levels also allow companies to increase dividend payouts. Both factors should have a positive impact on stock prices.
The most promising sectors for investors
For investors, we think the best opportunities can be found in AI, travel and education, electric vehicle and battery makers, contract development and manufacturing names, as well as healthcare.
While the technology cycle has been showing signs of bottoming out in China, AI looks to be a timely catalyst. Our portfolio is geared towards names set to benefit most from this rapid technological development, such as Chinese internet names with AI exposure.
We also anticipate secular growth in both travel and education, driven by technological shifts, will have a positive effect on overseas test preparation providers and online travel platforms.
In electric vehicle and battery makers, we stick to industry leaders with above-average profitability and technology leadership.
Contract development and manufacturing organisation (CDMO) names across China, India and Korea are emerging as winners of a secular rise in Asia’s healthcare and biotech innovation. Against this backdrop, greater health awareness among an ageing population is boosting the prospects of CDMO names and leading pharmaceutical companies.
Overall, 2024 looks set to be a better year both for the Chinese economy as a whole and specific sectors. As these improvements become apparent, we expect investor confidence in Chinese equities to improve as well.
