Investor sentiment in China has improved significantly, fund managers said, and some are optimistic that the sentiment could last — as long as Beijing follows through on key policy measures to stimulate the markets and economy.
The CSI 300 index rose 23.83% between Sept. 24 and 30, after Chinese regulators announced surprise rate cuts and other policy measures to stimulate the markets. Stock markets in mainland China have been closed since Oct. 1 due to a public holiday.
The government policy measures include cutting the seven-day reverse repurchasing rate by 20 basis points and the reserve requirement ratios for banks by 50 basis points.
Regulators also said they would inject capital into state banks and the country’s topmost government councils publicly endorsed the stimulus package, lending weight to the announcement.
“All this shows that the economic pains might have reached a ‘pain point’ that has touched Beijing’s political nerves. Examples include the youth unemployment rate hovering at around 20% and surging numbers of lossmaking Chinese companies since COVID-19,” said Chi Lo, Hong Kong-based senior market strategist for Asia Pacific at the €576 billion ($643 billion) BNP Paribas Asset Management in a report on Oct. 3.
Fund managers observed that investor sentiment improved significantly, with some comparing the rally as reminiscent of the post-global financial crisis bull market.
Many are also optimistic that this surge could have long-term effects, unlike the false start early in 2024 when the market rallied slightly between March and May on expectations that authorities would release sustained measures to support the market.
Sense of urgency
The regulators’ September measures also indicate that authorities recognize the urgency needed to boost the economy, money managers said.
“The deterioration of China’s economic fundamentals, particularly the property market downturn and weakening consumption, has reached a point where policymakers see a need for decisive action. This urgency is evident in the off-schedule Politburo meeting and the unusually direct language used in the policy statements,” Victoria Mio, Singapore-based head of Greater China equities at $361.4 billion Janus Henderson, said in written comments.
The policy measures also addressed the real estate sector slump and consumer confidence, and more measures are expected to be announced in the coming weeks, she said.
Mortgage rates will be cut by an average of 50 basis points, potentially saving 150 billion yuan ($21.3 billion) in interest expenses, Mio added.
“This move should ease financial pressure on homeowners and stabilize the property market in the coming months,” she said.
BlackRock CEO Larry Fink this week called on Western asset managers to review their investments in China. “We have businesses in China. I’m sure everybody here has some businesses in China,” Fink told a conference. “We all have to re-evaluate that, like we have to re-evaluate a risk in liquidity traps, a risk in everything.”
But at the same time, money managers have been repositioning their portfolios and reaping the rewards of the changing tides.
RBC Global Asset Management, for instance, which managed $468 billion in assets as of June 30, has been reducing its structural underweight to China over the last two years, adding exposure to consumer-related stocks, and focusing on high-quality companies operating in areas of structural growth, said Laurence Bensafi, London-based deputy head of emerging markets equities, in emailed comments.
The fund manager is focused on themes including domestic consumption, digitalisation, health and wellness and green infrastructure. "These names were indiscriminately sold during the weakness and became very undervalued in our view,” she said.
“Following last week’s gains, MSCI China has recovered its year-to-date losses and is trading at 9.4x one-year forward earnings, compared with a 10-year historical average of 11.3x. While the market moves have been sharp, there is still upside potential from a valuation standpoint,” she added.
Valuations, follow-through
Chinese equities are trading at attractive valuations, Janus Henderson’s Mio agreed.
“The MSCI China Index has a 12-month forward P/E ratio of around 10.3x (as of Sept. 30), making it one of the cheaper markets compared to global peers. This presents a unique entry point for investors looking for value in a market with substantial growth potential,” she said.
“The recent policy announcements have created positive momentum across sectors such as technology, consumers, property, commodity, healthcare, and financials; high-quality companies with strong fundamentals are likely to benefit the most from the increased liquidity and supportive policies,” she said.
In general, investors also appreciate the Chinese government’s decisive stance and are optimistic about the China market’s outlook — provided authorities follow through on their messaging and deliver more policy support.
“Whether this is the turning point for the Chinese market remains to be seen,” Lo from BNP Paribas’ AM said.
“The stimulus package does not directly address the consumer confidence problem and the inventory problem in the property market. Crucially, assertive fiscal easing measures are absent. Even the cash handouts to consumers are too small to have any macroeconomic impact.”
China needs to sustain its easing efforts to give investor more confidence, he said, adding that investors should look out for more stimulus measures, stabilization in property market transactions and prices, signs of recovery in consumption and private-sector investments, and a sustained recovery in credit impulse.