Chinese Equity Valuations At Attractive Levels, Despite Gloom

Amanda Cheesley Deputy Editor 11 August 2023

Chinese Equity Valuations At Attractive Levels, Despite Gloom

Despite China's latest deflationary data and a slump in exports, David Perrett, co-head of Asia-Pacific equities at M&G Investments, is optimistic about Beijing's intention to stimulate the economy. He joins other investment houses in extolling Chinese equities, believing them to be undervalued.

After the end of the pandemic, the Chinese economy was supposed to be on the upswing again as usual. But Chinese exports slumped by 14.5 per cent in July, much more sharply than expected, David Perrett at London-based investment manager M&G Investments, said this week.

"Expecting a strong economic boost in China after the end of the Covid restrictions was a bit premature from an investor's point of view. More importantly, the critical real estate sector was going through a painful downturn, which negatively impacted economic activity and consumer sentiment,” Perrett said in a statement.

In recent months, he believes that investors have consequently become increasingly worried that policymakers have not fully grasped the current headwinds the Chinese economy is facing and that the risk of further economic weakness is rising.

“The Politburo meeting at the end of July was therefore an important signal," Perrett said. "Compared to previous statements, the tone changed. It was acknowledged, for example, that the economy is weaker than desired and that policy must respond to this, especially with regard to the real estate sector and domestic demand. With the country running a large current account surplus, policymakers have additional room for fiscal and monetary stimulus as well as regulatory easing,” he added.

“Currently, the stimulus package is mainly aimed at increasing domestic demand. The automotive sector is being strengthened. In addition, there are tax breaks and subsidies for the modernisation and purchase of housing. These measures have kickstarted a reset of sorts,” he continued. “In the process, Beijing is looking to broaden the impact by encouraging local authorities to "optimise" Chinese property policies to best suit the needs of the local community. In larger cities such as Beijing and Shenzhen, for example, restrictions on the purchase of flats are to be eased and reliable borrowers will receive favourable conditions for buying a larger house,” Perrett said.

“Also, among other things, home improvement works will be promoted, restrictions on the ownership of used cars will be lifted or incentives for the introduction of electric cars will be improved,” he added. Perrett believes that this should start to have an impact on the real economy, especially if the incentives are well implemented at the local level. “A broad demand push should hopefully lead to self-sustaining supply and demand dynamics in the longer term,” he said.

In the future, however, Perrett thinks that China needs to become less dependent on the real estate sector. “In the semiconductor industry, China is still lagging behind the leaders, but is already becoming the world market leader in numerous environmentally friendly technologies. China is already the largest producer of renewable energy products and the leading supplier of electric vehicles. This leadership will have a tangible impact on global markets over the next decade,” he said.

“In the area of digital supply chain management, Chinese companies are already revolutionising a number of global retail markets, including the fast fashion industry,” he added.

In the coming months, Perret believes that investors will be watching for more details on stimulus measures and the impact of adjusted trickle-down policies. “Importantly, the current starting point for Chinese equity valuations is largely at very attractive levels," he said.

Perret isn't alone in holding an optimistic view of China. Even though China's economy has fallen into deflation after consumer prices fell year-on-year in July by 0.3 per cent, Mark Williams, portfolio manager at Somerset Capital Management, said: "Despite yesterday’s deflationary data from China, we believe parts of China remain in a better economic position than many give it credit for. In July, domestic flight bookings and hotel bookings surpassed pre-Covid levels, indicating that domestic consumers are gradually shaking off the lockdown psychology to spur their return to more normal patterns of activity."

"The Chinese Communist Party (CCP) reinforced their intention to stimulate the economy in the July Politburo meeting. Little of this, however, has yet been priced in at an equity level, and Chinese stocks are continuing to trade at huge discounts to Western markets for what has been the best part of 20 years," he continued. Within these markets, Williams believes there are still businesses with strong fundamentals that are currently extremely undervalued.

His views have been echoed by Ronald Chan, founder and CIO of Chartwell Capital, an investment firm based in Hong Kong. He also thinks that there are hidden gems to be found in the country, for instance in healthcare, even though markets fell recently. “This provides a good opportunity to jump back into the market when things are cheap,” he said. See more here and here.

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