Have We Seen the Bottom in China Stocks?

Should We be Counting on a ‘Beijing Put’?

Chao says the Fed provides a floor to the market using monetary policy tools whilst the Beijing put includes monetary and fiscal policies. He says: “The Beijing put is equally strong as, if not stronger than, the Federal Reserve put. Beijing also controls state-owned enterprises that purchase, say uncompleted or unfinished housing projects; they control industrial policies.”

Also eyeing government macro support as a future driver of positive returns, Fidelity is turning more positive on Asia from a multi-asset perspective. Taosha Wang, multi-asset portfolio manager, says the firm is taking positions in key economies in Asia as “a useful diversifier that is insulated to a degree from the struggles facing Europe, with less inflationary headwinds”, while maintaining an underweight position for risk assets, across equities and bonds.

In particular, China enjoys more headroom for policies that steer growth, which differs from many other parts of the world where high inflation is forcing central banks to tighten financial conditions. Wang also believes that the 20th Party Congress in China could “herald more policy certainty into 2023 and increase assertiveness in government stimulus,” in addition to the various policies in place to ease the stress in the property markets.

Sure, Government Measures Are Ample – But Are They Enough?

Sue Trinh, head of macro strategy for Asia at Manulife Investment Management, argues that the stimulus is not sufficient as there are many deep-seated issues that remain unresolved. Among those obstacles to growth, a major one remains the rising economic costs of zero-COVID policies.

“[The costs of zero-COVID policies] will continue to hold back efforts to rebalance the economy and transition to consumption-led growth; worsening developments in the property sector; and a slowdown in export growth as global demand weakens,” says Trinh. “Policy support remains underwhelming relative to the scale of the economic challenges that the economy faces,” she says.

Rather, she expects further downgrades to those forecasts down the road. Reasons are both from the Chinese economy itself as well as from the global system. Elevated debt levels, intense demographic challenges, and an increasingly zero-sum global economic environment all contributed to a bleak outlook.

She continues: “While consensus GDP growth forecasts for 2022 have been revised down meaningfully, we continue to think that expectations for China’s medium- and long-term economic growth prospects remain too optimistic.” In her view, it is too early to expect a turnaround as “required shifts in the fundamental outlook have yet to materialize”. This is also given that China may feel a pinch from a stagflationary global backdrop.

Finally, the Stockpicker’s View

Martin Lau, managing partner at FSSA Investment Managers, who manages Silver-rated FSSA China Growth Fund, says investors should emphasize the intrinsic value of a company and the profit it could generate to ride through various investment cycles. He says: “Investors generally pay too much attention to macro factors, or economic data such as inflation, interest rates, and regulation. But in my experience, concerns such as these often come with the best opportunities. In contrast, I would be worried if everyone was walking in the same direction, doing the same thing, or focusing on the same sector.”

In terms of how he picks stocks, Lau says: “Investors need to do something different to capture good long-term opportunities. When everyone is selling this provides good opportunities to buy, as company valuations fall.”

The contrarian stockpicker finds the property sector attractive, despite their home sales having dipped by as much as 40%, and has a general preference for quality names that could pass on their rising costs to customers. “When a sector is in such bad shape and becomes under-invested, new growth opportunities may arise over the next 2-3 years. A sector in the trough of its cycle could offer attractive investment opportunities for the future,” he says.

FSSA’s Lau also uses the regulatory storm in 2021 as example. He thinks risks are already reflected on the current market price. Looking ahead, tightened scrutiny could result in a healthier industry environment. “With increased regulatory scrutiny, companies might take a more disciplined approach instead of making unnecessary expenditures, for example. The sector consolidation has forced smaller-scale and unprofitable weak players to shut down, meaning less competition around to help improve the earnings of larger survivors.”