The Week: China: finally, a turnaround?

Few dispute the difficulties still facing the Chinese economy. However, they may not prevent a revival in the country’s stock market. 

  • Fund managers are growing more bullish on China
  • There have been some early signs of a revival in the Chinese market
  • China appears to have got little credit for some thawing in US/China relations

The bear case for China is well-understood. Its property market is on a parlous state, with around 30m unsold homes . This has an impact on consumer confidence and spending. Its consumers are sitting on cash, still reluctant to spend, even as the sceptre of Covid retreats. The geopolitics are difficult, with concerns that China is every bit as toxic as Russia or North Korea. 

However, fund managers are growing more bullish. The emerging market teams at Hermes, Lazard and Carmignac have been raising their exposure in recent months. Mark Preskett, portfolio manager at Morningstar has been lifting his China weighting in the group’s multi-asset portfolios and says: “It is by far the cheapest market in the world and we believe the risks are priced in.” He goes as far as to say it could be the strongest growth driver in the portfolios in the year ahead.

Fund managers talk about getting growth stocks at value prices. The best example may be TenCent, which has a social media platform every bit as powerful as some of its US equivalents, but trades on a forward price to earnings ratio of just 14x, almost half that of Meta. 

There have been some signs of a revival in the Chinese market, though it is early days. The average fund in the IA China/Greater China sector has outpaced the average fund in the IA India sector by around 7% over the past month. Preskett says there are signs outflows are slowing from Chinese funds. 

Equally, China appears to have got little credit for some thawing in US/China relations. Leaders Jinping and Biden have met, and there have been some efforts to smooth trade tensions between the two countries. A Trump presidency may prove disruptive, but Trump’s bark has generally been worse than his bite. At the same time, China has been relatively restrained on Taiwan, even if this remain a long-term risk. 

There are also signs that China is willing to do more to stimulate its economy. There are rumours swirling over a currency devaluation. The Politburo of the Communist Party said at the end of April that China plans to step up support for the economy with selected monetary and fiscal policy. 

Chinese markets are due a bounce-back and there are some signs that this is happening in spite of the ongoing problems in the economy. Whether this prompts a more enduring reappraisal of Chinese assets is a separate question.