M&G Investments: The current starting point for Chinese equity valuations is at very attractive levels

by | Aug 8, 2023

After the end of the pandemic, the Chinese economy was supposed to be on the upswing again as usual. But now Chinese exports have slumped by 14.5% in July – much more sharply than expected. With a series of measures, the government in Beijing wants to give new impetus to the sluggish economy. David Perrett, Co-Head of Asia-Pacific Equities at M&G Investments, comments on the prospects for success:

“Expecting a strong economic boost in China after the end of the Covid restrictions was a bit premature from an investor’s point of view. After all, unlike most Western economies, the Chinese industry did not by any means fully lock down during Covid, so the resultant bounce back was much more muted. More importantly, the critical real estate sector was going through a painful downturn, which negatively impacted economic activity and consumer sentiment.

In recent months, investors have therefore become increasingly worried that policymakers have not fully grasped the current headwinds the Chinese economy is facing and that the risk of further economic weakness is rising. The Politburo meeting at the end of July was therefore an important signal. Compared to previous statements, the tone changed: It was acknowledged, for example, that the economy is weaker than desired and that policy must respond to this – especially with regard to the real estate sector and domestic demand. With inflation not a policy constraint in China and the country running a large current account surplus, policymakers have additional room for fiscal and monetary stimulus as well as regulatory easing.

Currently, the stimulus package is mainly aimed at increasing domestic demand: The automotive sector is being strengthened. In addition, there are tax breaks and subsidies for the modernisation and purchase of housing. These measures have kickstarted a reset of sorts. In the process, Beijing is looking to broaden the impact by encouraging local authorities to “optimise” Chinese property policies to best suit the needs of the local community. In larger cities such as Beijing and Shenzhen, for example, restrictions on the purchase of flats are to be eased and reliable borrowers will receive favourable conditions for buying a larger house. Also, among other things, home improvement works will be promoted, restrictions on the ownership of used cars will be lifted or incentives for the introduction of electric cars will be improved. All this should start to have an impact on the real economy, especially if the incentives are well implemented at the local level. A broad demand push should hopefully lead to self-sustaining supply and demand dynamics in the longer term.

In the future, however, China wants to become less dependent on the real estate sector. In the semiconductor industry, China is still lagging behind the leaders, but is already becoming the world market leader in numerous environmentally friendly technologies. China is already the largest producer of renewable energy products and the leading supplier of electric vehicles. This leadership will have a tangible impact on global markets over the next decade. In the area of digital supply chain management, Chinese companies are already revolutionising a number of global retail markets, including the fast fashion industry.

In the coming months, investors will be watching for more details on stimulus measures and the impact of adjusted trickle-down policies. Importantly, the current starting point for Chinese equity valuations is largely at very attractive levels.”

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