Guide to China 1Q 2024
Are Chinese equities finally cheap enough? And are there EM opportunities beyond China?
2023 marked a third consecutive year of double-digit declines for Chinese equity markets, now down 60% from their early 2021 highs. Foreign investor outflows increased in the later part of 2023, with Chinese equities at decade low allocations in global portfolios. As a new year is about to begin in China, investors wonder: What will turn sentiment around? Are valuations cheap enough to justify the uncertainty ahead? Key issues for investors to consider include:
- Tracking all the recent monetary, fiscal and quasi-fiscal policy support
- Monitoring the stimulus’ impact on household and private business confidence and spending
- Looking for signs of stabilization in the housing market and deflationary pressures
- Gauging signs of peak pessimism on valuations, flows, and positioning
- Rethinking the way to invest in China and broader EM
[UPLIFTING MUSIC] Chinese equities have had a brutal three years and are now off 60% from their early 2021 highs, led largely by a multiple de-rating. Foreign outflows from China really picked up last year, and when we look at global investor portfolios, allocations to Chinese equities are near a decade low. As the Chinese New Year is about to begin in China, I think investors are asking themselves, what will it take for investors to gain some confidence again in China? And/or, are valuations cheap enough to justify all of the uncertainties that lie ahead?
Last year, investor confidence really saw some wild pendulum swings, from a lot of optimism at the beginning of the year about China's reopening, about maybe even seeing 6% GDP growth in 2023, all the way to the other side of a lot of pessimism about China ever finding its economic footing again. And if we take a look at last year, growth did pick up, from 3% in 2022 to 5.2% in 2023. It's just that the pace of consumption disappointed, and private investment in real estate activity continued to contract.
So for this year for investors to gain confidence, it's really important, well, for consumer and business confidence to improve, and also for us to finally see some long overdue stabilization in real estate prices and activity. In order to get us there, it'll be really important for investors to see a continuation of the pro-growth tone and measures by Chinese policymakers. And these did begin about November of last year and have continued into this year. And it includes, for example, more constructive dialogue with the private sector and foreign businesses. It also includes direct monetary, fiscal, and quasi-fiscal measures.
Lastly, it'd be very important to continue seeing a slight dialing down of geopolitical tensions. Should investors see even a surprise, maybe demand-side stimulus, that would allow them to gain even more conviction about economic momentum ahead. When we do look at valuations, though, and look at what's priced, the multiple is actually at near historic lows-- now below nine times on the price to earnings, which is about 20% below its 25-year average. There is a lot of pessimism reflected now, a lot of risk premium.
And when we look at positioning, a lot of those outflows have led, now, to Chinese equities being, at consensus, underweight for a lot of investors. And historically, when we've been in this place, Chinese equity recoveries have come fast and furious. So there's a certain cost of being too underweight or too off-sized Chinese equities going forward. Beyond a tactical beta rebound ahead, there's also plenty of opportunities for alpha in China. And this really is the main investment opportunity, in our view-- focusing on the new priority sectors of the new-new China economy, including business innovation, green technology, and domestic consumption.
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