Market backdrop

Signs emerged at the end of the third quarter that things may be starting to change for Chinese investors, with the large, coordinated stimulus package unveiled at the end of September demonstrating that the Chinese government will do what it takes to support the economy and avoid a more severe downturn.

September’s stimulus announcement was significant. The measures included a half percentage point reduction in the Reserve Requirement Ratio (RRR) to free up about RMB 1 trillion of liquidity in the banking system and make more funds available for lending and investment, a reduction in interest rates for existing mortgages, a lowering of minimum down payments on homes to help support the property market, and new liquidity facilities to help stabilise the stock market and encourage investment.

The Ministry of Finance has since followed up with an additional package of fiscal measures, announced on 12 October, which are designed to prevent the proliferation of financial risks in the economy, and more stimulus measures are expected, with the National People’s Congress Standing Committee meeting on 4-8 November the next potential signpost to look out for.    

Investment perspectives

A game changer or more of the same?

While there is no easy fix to China’s economic problems, the intensifying policy response may represent a signal to re-engage with the world’s second largest stock market:

• Tail risks have been reduced: September’s large, coordinated stimulus package has served to demonstrate to investors the determination of the Chinese authorities to put a floor under the economy.
• Valuations are attractive: With valuations at, or around, multi-year lows and trailing earnings growth now starting to show signs of picking up, Beijing’s determination to support growth should help to restore investor confidence.
• Sentiment could improve further: Additional policy responses over the coming months could further boost confidence, particularly if part of a targeted and measured response designed to avoid the creation of further bubbles in the economy.
  

Fund positioning

• JPMorgan Funds - China Fund
• JPMorgan Funds - China A-Share Opportunities Fund
• JPMorgan ETFs (Ireland) ICAV - China A Research Enhanced Index Equity (ESG) UCITS ETF

In our China equity funds, over the third quarter we added to stocks that combine a solid yield with growth, for example in utility and consumer electronics stocks. We continue to ensure that we have adequate exposure more broadly to consumption (for example ecommerce) and capital market sensitive stocks (for example insurance).

In terms of future positioning, we await further announcements on potential fiscal stimulus, which could create a demand buffer and stabilise earnings more broadly.

Investment focus

Focus on the alpha, not the beta

Many Chinese companies are already adapting to the slower growth environment by improving their capital allocation and by looking to boost shareholder returns. The key for investors is to be able to differentiate between the companies that are adapting to China’s new slower growth environment and are able to still grow their earnings over time, and those that are being left behind. There are examples across both the state-owned and private sectors to illustrate how companies are adapting.

Major state-owned companies have a track record of paying dividends to minority shareholders
China Construction Bank, for instance, has a provided a relatively stable income stream to its shareholders for many years, while oil and gas company Sinopec has maintained an attractive dividend payout for many years.

Private companies are now focusing much more on shareholder value as the economy slows
In the ecommerce sector, for example, Alibaba has implemented its first regular dividend and a significant share buyback programme, reflecting a broader trend among Chinese companies to focus on shareholder returns rather than aggressive reinvestment. Alibaba’s dividend yield, combined with its buyback programme and future earnings growth, offers attractive total return potential for investors.

Chinese companies are adapting to boost future growth potential
Dairy producer Mengniu has been focusing on improving its product mix and expanding its market share, which should support its long-term growth prospects, while gas distributor China Resources Gas has been expanding its customer base and investing in infrastructure to support future growth. Its focus on operational efficiency and cost control has also helped improve profitability.