Chinese New Year

Investment trust managers on the outlook for China in the Year of the Dragon.

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10 February 2024 marks Chinese New Year with the Year of the Dragon. The dragon symbolises strength, wisdom, luck and prosperity.

But this week’s news that indebted property developer China Evergrande is to enter liquidation is not exactly filling investors with confidence for the year ahead.

Since the post-Covid stock market rally fizzled out in early 2021, the performance of Chinese equities has been disappointing. Could 2024 be the year when the dragon breathes fire to reignite China’s economy once more?

The Association of Investment Companies (AIC) has collated views from investment trust managers who invest in China to hear their views on the outlook for the second largest economy in the world.

Does China represent a buying opportunity?

Pruksa lamthongthong, Manager of Asia Dragon Trust, said: “Yes. Chinese stock markets have just come off an extremely tough 2023 and are now among the cheapest markets across the world. We have seen investors prioritise short-term gains and chase hot themes like AI and reforms to state-owned enterprises, given a challenging macro backdrop of a delayed consumer recovery and a weak property sector. Even quality companies with good fundamentals have been caught in this rotation, which has been more severe in mainland (A-share) markets.

“At the start of 2024, we are still seeing weakness persist in mainland markets. Encouragingly, though, fundamentals remain intact and we are expecting high single-digit earnings growth for the entire market. This, along with depressed valuations, lays the ground well for an eventual recovery, as the benefits of monetary and fiscal stimulus gain traction in 2024.”

Sophie Earnshaw, Co-Portfolio Manager of Baillie Gifford China Growth, said: “As geopolitics and macroeconomic challenges have taken centre stage, the exciting growth stories for many individual companies have been overlooked as share prices have diverged from fundamentals. Consequently, valuations now support the exciting outlook for a number of companies in the world’s second largest economy, which remains unique in the size of its markets and the scale of the opportunities it offers.”

Fiona Yang, Portfolio Manager of Invesco Asia Trust, said: “We are overweight China across the portfolios within the Asia and emerging markets equities team for two reasons: the valuations on offer are compelling, and expectations are undemanding at the stock level, meaning that the odds of beating consensus are higher than for example in the Indian market. Our contrarian mindset leads us to be overweight China and underweight India, without relying on big macro calls as this positioning is backed by company analysis.

“The recent talks of a rescue package to stabilise the market would send a positive signal, and we are not surprised that China is reportedly intervening to stabilise the market and confidence, as is commonplace in market downturns, via regulatory changes and direct stock-buying. More importantly, we can observe that attitudes towards China are currently so weak that deeply discounted equity valuations appear be very sensitive to signs of improvement in the economy and the corporate sector.”

Rebecca Jiang, Portfolio Manager of JPMorgan China Growth & Income, said: “We believe most of the widely discussed bad news has been priced in. At these relatively low levels, we see significant potential for the market to respond positively to incremental good news. We remain optimistic about the long-term prospects for the Chinese stock markets and the opportunities that will benefit the patient investor, and are encouraged by recent shifts in government policies, designed to promote economic growth and boost consumer confidence. We are also finding attractive investment opportunities provided by companies that offer superior earnings growth or are benefitting shareholders by introducing regular dividends.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “The long-term plan of the Chinese government seeks to reduce the economy’s reliance on investment and property and pivot away from some of the country’s traditional growth drivers towards high-end manufacturing and domestic consumption. The pace of innovation in China remains strong, primarily led by private sector enterprises in sectors such as industrials and health care. These factors are driving consolidation across a range of sectors, many of which remain very fragmented, such as building materials.

“In emerging sectors, opportunities can be also found in the renewable energies and electric vehicle (EV) value chain, particularly those providing key components and services, such as battery manufacturers or auto parts suppliers. The huge sell-off has created opportunities to invest in those companies that have dominant market share in their home country, generate abundant cash flows and trade at compelling valuations. We’ve therefore been investing more in these areas.

“Equally, while overseas investors may focus on the impact on China of de-globalisation and ‘near-shoring’ of industry, one consequence of this is an increasing preference among Chinese consumers for Chinese brands, resulting in domestic companies taking ever greater market share in what remains one of the world’s largest markets.”

Yoojeong Oh, Fund Manager of abrdn Asian Income Fund, said: “The abrdn Asian Income Fund has a natural underweight position in China for two main reasons: first, the market is dominated by large internet companies that do not pay dividends. Second, a lot of the high yielding names are state-owned enterprises, in sectors such as banking and utilities, and we find similar high yielding companies with higher transparency and more established governance structures elsewhere across the Asia Pacific region. While we have doubled our China exposure in the last seven years, we are still significantly underweight because the benchmark’s China weight has tripled, largely due to the sharp growth seen from the internet companies.

“From a broader perspective, there has been a strong sell-off in China in 2023. There is an apparent disconnect between market sentiment, as seen in valuations and headlines, versus the economic reality on the ground. Activity data has been signalling that the Chinese economy has found firmer footing towards the end of the year, and corporate earnings growth compares favourably to other equity markets, despite the challenges China faces. With much of the negative headlines in China already priced in, a period of calm followed by some positive news could open the possibility of a market bounce.”

Doug Ledingham, Portfolio Manager of Stewart Investors, which manages Pacific Assets Trust, said: “As the economy in China deteriorates and political and geopolitical headwinds strengthen we are frequently asked if China is investible. We think the answer is ‘yes’.

“The trust now owns nine Chinese companies: each has a private entrepreneur, family or steward behind it who we trust to continue their track record of treating minority investors fairly while building unique and enduring franchises. A consequence of asking ‘what could go wrong?’ as well as ‘what can go right?’ has been our need to appraise how businesses in China are aligned with the objectives and aims of Xi Jinping and his Chinese Communist Party. This focus on capital protection allowed the trust to avoid the redrawing of the rules in the Chinese education and fintech sectors. Again, thanks to our ability to be truly bottom-up, we can be very picky in the companies we choose to own in China. If we were to see a deterioration in the industries in which our companies operate, greater political involvement or stretched valuations there should be no surprise if the trust’s exposure to China were to fall again.”

Main risks facing China’s economy and stock market

Sophie Earnshaw, Co-Portfolio Manager of Baillie Gifford China Growth, said: “The domestic economy remains under pressure, with consumer confidence low amid concerns in the property sector. The near-term macroeconomic picture is unexciting, and the broader geopolitical climate will likely remain a headwind to foreign investment.”

Rebecca Jiang, Portfolio Manager of JPMorgan China Growth & Income, said: “Chinese stock markets look set to face challenges over the coming year. Moreover, while the recent resumption of high-level talks is encouraging, tensions between China and the US are likely to persist, and an escalation in anti-Chinese rhetoric ahead of this year’s US presidential election cannot be ruled out. China is also facing the structural challenge of transitioning away from its heavy reliance on fixed asset investment, in particular property development. Other headwinds include concerns about global supply chains and conflict in Ukraine, as well as Israel and Palestine, which may also impact market sentiment in the near term.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “In the face of the problematic property market in China, the refinancing conditions for property developers will likely remain challenging in the near term despite more supportive policies. However, this is not detrimental to all property developers. While we don’t expect a huge property rebound given the structural challenges, home prices are showing signs of resilience, especially in top tier cities. Ultimately, the existing divergence between various developers could be magnified further. The indiscriminate sell-off has caused some mispricing, which provides an opportunity for active investors that can successfully identify the leading players, who are most likely to benefit from lower funding cost among peers and can gain market share while cash-strapped developers struggle.

“Apart from the property crisis, job and wage cuts in 2023 have also hurt consumer confidence, resulting in weak demand. However, from our discussions with companies on the ground, we have the sense that the worst is behind us. Over the longer term, improving corporate earnings could be a key driver for investor confidence to come back. Meanwhile, valuations in the Chinese equity market remain compelling both in historical terms and compared with some other major markets. Clearly, a lot of pessimism over the economy appears priced into valuations.”

ESG considerations

Sophie Earnshaw, Co-Portfolio Manager of Baillie Gifford China Growth, said: “A truly active and engaged approach to a small number of companies is important. As investors with a long time horizon, integrating ESG considerations into our research process is a tool to mitigate the risks of investing in China, but can also help discover where the best opportunities may lie.”

Yoojeong Oh, Fund Manager, abrdn Asian Income Fund, said: “Whilst ESG standards have improved in China over the last decade, there is still some way to go given the more nascent development of the economy, capital markets and regulatory oversights. Our approach is to always engage with the companies in which we invest to get better insight and encourage action that we believe will create long-term value, including in relation to ESG practice. We also vote at AGMs to drive change. Informed and constructive engagement helps corporations improve practices – through this we’re seeking to protect and enhance the value of the investments of abrdn Asian Income’s shareholders. More broadly, we look to work closely with governments, regulators, and industry bodies globally to advance policy, including that relating to social and environmental standards.”

Pruksa lamthongthong, Manager of Asia Dragon Trust, said: “We view ESG as important when investing in China and it is also an integral part of our overall assessment of a company’s quality. In China, we have found instances where a company has good ESG practices but has been found lacking in terms of its disclosure, and this is where we have sought to push for better disclosure via our engagement. There have also been cases where we have shared with our mainland holdings examples of best-in-class ESG practices elsewhere in Asia or the world for their consideration. More broadly, we look to work closely with governments, regulators and industry bodies globally to advance policy, including that relating to social and environmental standards, and in some instances partnering our holdings in advancing causes as well.

“Through the years, we have seen improvements in ESG across our Chinese holdings as a result of our engagement. More broadly, as active investors we aim to integrate ESG considerations into every stage of research, investment rating and selection, and portfolio construction. We actively engage with companies and assets in which we invest to get better insight and encourage action that we believe will create long-term value, including in relation to ESG practice. We also vote at AGMs to drive change. We also make clear to our trust investors how we are using our focus on sustainability to manage risk, optimise opportunity and act in their long-term interests.

“Informed and constructive engagement helps corporations improve practices – ultimately protecting and enhancing the value of the trust’s investments.”


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