Year of the Dragon: Will we see China roar back into life?
No doubt about it, China has been confined to the doghouse as an investment destination in recent years. But in the Year of the Dragon, can this huge economic powerhouse finally turn its fortunes around?
Tai Hui, Chief Market Strategist for JPMorgan China Growth & Income investment trust (JCGI) in Hong Kong, believes that conditions are now ripe for a meaningful recovery, after the past three difficult years for both the Chinese economy and the market.
2021 saw widespread and challenging regulatory reforms imposed on the Chinese tech sector, followed by another year of pandemic lockdown throughout 2022. The expected economic rebound as restrictions were lifted at the end of that year was thwarted by a painful correction for the property market in 2023, which fed into a broader slowdown in the investment environment.
Chinese property and consumer confidence
So where are we now? The property market has seen a range of measures put in place by the authorities to try and stimulate activity, says Hui. “A lot of buying restrictions have been lifted, mortgages are easier to obtain and rates have been reduced, which should help homeowners and attract new buyers.”
But he does not foresee a quick fix. Not only have Chinese incomes seen a slowdown in growth, but more importantly, property price expectations among the general population continue to be quite conservative.
“The conditions are in place, but we need a trigger to get buyers back into the market, and that could take some time,” Hui explains.
To that end, the Chinese government is working to get banks to back completion of a list of development projects. “Confidence is likely to be boosted if developers actually deliver finished projects, so consumers can be sure they’ll get the property they committed to,” he adds.
Revitalising the real estate market would in turn provide a boost for many other sectors, from white goods manufacturers to local governments reliant on income from land auctions.
Another key strand to recovery is consumer behaviour. In response to economic slowdown, households have been spending less, saving more and reducing their debt burden. Although spending is slowly picking up, “Chinese consumers are currently very keen on finding value for money, rather than going for expensive brands,” Hui reports.
On the policy front, government measures including interest rate cuts and reductions in reserve requirements have been ongoing for some time, with the aim of stimulating borrowing and boosting liquidity in the system. Again, though, poor sentiment is the sticking point, and so far there is little sign of lending growth within the private sector.
“We have the conditions in place for things to improve, but the spark to make it happen is lacking, and that’s about confidence,” explains Hui. “It may be triggered by the current improvement in exports, or by greater transparency from the government in terms of the recent regulatory rule changes that have caused uncertainty for many private companies and hampered investment.”
Government measures to support the Chinese economy
In the meantime, however, fiscal policy is doing a lot of the heavy lifting in terms of increasing liquidity to support the economy. Measures include a possible expansion of the current 3% fiscal deficit, and plans to issue one trillion yuan of special purpose bonds.
Fiscal subsidies for both consumers and companies on upgrading household equipment, cars and machinery are also on the table. “Hopefully that will provide some of the impetus and momentum needed to allow the economy to take off,” comments Hui.
China’s economic challenges are painfully reflected in its stock market performance, which has trailed global markets since 2021. As Hui points out, a turnaround in economic fundamentals is needed if the stock market is to see a sustainable rally rather than merely short-term tactical flurries.
Growth sectors in China
Nonetheless, there is some cause for optimism. Some sectors, including consumer discretionary, healthcare and communications services, have continued to produce earnings growth through 2023 and 2024, and that should pick up further.
Moreover, valuations are at rock-bottom levels, with the MSCI China on a price-to-earnings (P/E) ratio of just 8.4.1 “You’re looking at a market with pretty attractive valuations,” Hui says. “Global investors are concerned about expensive valuations, in the US for example, but Chinese equities offer something very different in terms of value.”
For Simmy Qi, Portfolio Manager, these low valuations coupled with the sheer breadth of the Chinese market mean there is now a wealth of investment opportunities for high-quality growth-focused investors.
The Trust remains overweight in sectors such as information technology, healthcare and industrials, as it has been for some time. “We still see growth opportunities in the mature internet space, particularly with these super-low valuations,” says Qi.
Tencent accounts for more than 12% of the portfolio, with the likes of Alibaba and NetEase also featuring in the top 10 and increasingly geared to shareholder returns through buybacks and dividends.
China remains a difficult place for investors; but the time is coming when the dragon will recover its mojo – and when that happens, quality growth investors such as JCGI should be strongly positioned to ride the wave of positive sentiment.