As China welcomes its new year, will it bring better fortune for its stock market?
- The crisis in the property market continues to weigh on economic growth
- Many of the more appealing, long-term factors for China still hold true
- The MSCI China dropped another 11% in 2023 and active funds lost an average of 20.2%
The Chinese year of the dragon begins on 10th February. The symbol of the Dragon is seen as auspicious, bringing transformation, prosperity, and growth. It would be a welcome change for investors who are hoping to avoid a fourth consecutive year of declines in Chinese markets. But is a recovery plausible in 2024?
The same questions are being asked of the Chinese market today as they were a year ago, and many of the same problems remain. Recovery is elusive, with consumers preferring to save rather than spend. The crisis in the property market continues to weigh on economic growth, exerting a reverse wealth effect on consumers, and preventing the government from issuing more stimulus.
At the same time, many of the more appealing, long-term factors for China still hold true. Consumers have money to spend, should they choose to spend it. There is still plenty of innovation. The Government’s ‘Made in China 2025’ programme is pushing development in key industries, such as semiconductors, aiming to foster self-reliance. The Chinese also lead the way on clean energy innovation.
If the debate over whether anything will bring investors back to the Chinese market is largely unchanged a key difference is that the market is now considerably cheaper. The MSCI China dropped another 11% in 2023 and active funds lost an average of 20.2%. It has been one of the few markets not to participate in the market rally since November.
The only area to have done relatively well in the Chinese market are the state-owned enterprises, which benefited from government initiatives to improve governance, return on equity and management incentives. However, the country’s genuinely innovative private businesses have seen their valuations sink further still.
China is now the ultimate contrarian play. There are plenty of reasons why the situation could get worse. The geopolitical environment is increasingly volatile and China is generally on the opposing side to the US. The property sector may be stabilising, but it is still difficult. The economy may recover, but it is likely to be a gradual process.
Nevertheless, the country still has good private companies producing strong earnings, with large addressable markets. If China is investable, then those companies have a value that is currently significantly underappreciated by markets. The slightly turn in sentiment could bring about a meaningful bounce. Nevertheless, the question over the role China should play in investor portfolios in the year ahead remains a head-scratcher for investors.
