Market backdrop

China real GDP rose 5.3% year on year and 1.6% quarter on quarter in Q1 2024, continuing the rebound in economic activity. It is noteworthy that the recovery is biased on the supply side with stronger growth in the manufacturing sectors, while challenges remain in consumer sentiment and real estate market.

On supply side, industrial production increased in May, featuring improved outputs in automobile and technology products. On the demand side, household savings increased by 12% during the 12 months to May 2024. Against this backdrop, developers are subject to mounting pressures from slowing property sales and lower sales prices. The weakness in property market in return affected household consumption via wealth effect and local governments through less fiscal revenue from land sales.

The steady drumbeat of small China stimulus announcements continued, and cumulatively they may be starting to have an impact. Although policy measures have been incremental, they have also been wide-ranging, covering fiscal, monetary, housing, capital market and foreign exchange. The focus is not on directly stimulating demand but rather on eliminating tail risk.

We believe that China’s overall macro picture has shifted more towards growth, with the tailwind of government policies focused on restoring industry and consumer confidence. The economy’s ability to produce more output is not the major challenge: rather it is the ability of domestic and global demand to absorb that output. With the pick-up in export orders and the impact of domestic policy support in recent months, we believe there may be better near-term momentum in economic activity as the year unfolds.

Investment perspectives

China is cheap – but what does that mean?

Valuations are at historic lows and the downside from here is quite limited. China continues to face headwinds, but we feel there is still opportunity to create alpha, especially as a lot of this is already priced in. China is trading at 1.3x price-to-book value and 9.4x price-earnings (data from J.P. Morgan Asset Management, Bloomberg, end-June 2024), both considerably below long-term averages.

Don’t wait for obvious catalysts or it may be too late. Once a catalyst is obvious it is usually already reflected in equity markets. In past cycles, investors buying Chinese equities at current levels of price/book have typically enjoyed attractive subsequent two year returns. Past corrections and subsequent bounces lead us to believe that the equity market recovery is likely to persist. We believe that the upward path for earnings will justify a higher return on equity, which in turn could lead to a rerating, making a fertile ground for our active managers.

A number of domestic champions or companies presenting strong earnings potential are currently trading at a large discount. For instance, our expected earnings growth for the Chinese provider of online entertainment video services iQIYI is double digit (~20%) given the growth potential with the business turnaround, while the company currently only trades at 9x 12-month forward P/E ratio (data from J.P. Morgan Asset Management, end-April 2024). 

Source for all data: National Bureau of Statistics of China, as of 30 June 2024, unless stated.

JPMorgan Funds - China Fund

JPMorgan Funds - China A-Share Opportunities Fund

JPMorgan ETFs (Ireland) ICAV - China A Research Enhanced Index Equity (ESG) UCITS ETF

Our long-term portfolio positioning remains consistent, with overweights in technology (e.g. AI proxies) and renewable energy (e.g. solar and EV supply chain). We added to stocks which offer an attractive risk/reward trade-off and the prospect of a near-term cyclical turnaround as the macro environment improves.

Overall, we have stayed true to our philosophy, with a focus on growth with a quality tilt. We retain our conviction in structural growth opportunities, namely technology, carbon neutrality and consumption. Trade tensions are a key near-term risk in this election year, so we have cautiously managed our exposure in certain stocks which are highly exposed to exports.

Investment focus

We retain our conviction in structural growth opportunities, although we monitor closely the short-term developments. Our key themes are:

• Technology: driven by industry upgrades and import substitution, China offers a diversified range of opportunities in areas such as semiconductors, automation and software.
  • Example - Beijing Kingsoft Office (#1 China enterprise company)
• Carbon neutrality: cleaner government policy, evolving consumer preferences, and a drive towards energy independence is positive for new energy, including the global solar industry, technology enablers to help transform “Old” China, and the EV supply chain.
  • Example- CATL (Global EV supply chain, not just Chinese OEMs)
• Consumption: this sector offers many opportunities, from the ability to upgrade as consumers become wealthier, to high tech medical products and services in areas of the market with lower regulatory risk, to alcoholic liquor stocks which will benefit from a rise in post-lockdown socialising.
  • Example - JD Health (One of the largest self-operated online pharmacies in China)