In this exclusive analysis, Jian Shi Cortesi, Investment Director, China Fund Manager and Asia Equity Funds at GAM Investments, shares some of the reasons he is positive about finding value in the world’s second largest economy.
In recent months, Chinese stock markets have been hit by weak confidence levels. The MSCI China Index is up more than 50% from its previous peak at the end of October this year. Investor confidence in Chinese stocks is at its lowest level since the 1998 Asian financial crisis.
Chinese stocks face a turbulent year in 2023. An asset market crisis, geopolitical tensions and a weak yuan have prompted many investors to dump Chinese stocks.
However, there are signs that this is changing. The Chinese economy is undergoing a major transformation. To reduce reliance on real estate construction, the country’s economy is shifting towards higher value-added industries. We expect this to have a positive effect on the fortunes of Chinese companies in various sectors.
In conversation with Jian Shi Cortesi
Before we get back to Gian’s insight, here’s a reminder to check out our latest IFA Talk podcast, which you can also listen to Here. With a thorough understanding of Asian markets and his extensive experience investing in them, Jian makes an excellent case for why investing in China and Asia makes real sense at this stage of the cycle.
Economic slowdown offsets weakness in real estate
Given the counter-cyclical nature of Chinese policy, we believe the Chinese government will continue supportive policies next year to stabilize asset sales and support economic growth. Low inflation leaves room to maintain expansionary monetary policies. Financial cost is also encouraging. We believe that expediting the bankruptcy and asset liquidation processes of troubled developers will help the real estate market return to a healthy state.
In 2024, we expect sluggish property construction. Shifting low-cost manufacturing to countries where labor is cheaper will continue to drag down economic growth.
However, we expect advanced manufacturing, particularly in aerospace and robotics, to be a key driver of Chinese economic growth.
A further boost to the economy could come from new energy equipment, for example the solar supply chain. China is estimated to become the largest car exporter by 2023, thanks to growth in the electric vehicle space – which will support the battery market.
Consumption-oriented sectors such as travel will also benefit the economy. Artificial intelligence (AI) and technology self-reliant industries such as semiconductors, pharmaceuticals, biotechnology and medical devices should also drive growth.
Signs of a turnaround in Chinese stock performance
Because of low valuations, the MSCI China Index has dramatically underperformed the MSCI World over the past three years. The MSCI China index’s price-to-sales relative to MSCI World was roughly 1.1 a decade ago. Today that ratio is roughly 0.5, which shows how much China has devalued. MSCI China’s price-to-book ratio is also near historic lows.
Although both China’s economy and corporate earnings have grown significantly during this period, the MSCI China Index has delivered little performance over the past 19 years. For investors like us who want to buy good companies at attractive prices, the current market environment sees exciting times with plenty of stock picking opportunities. The sectors and companies most affected by investor misconceptions present the most interesting opportunities.
Several companies in our portfolio have delivered strong earnings results. Although some of these results have been ignored by the market and have not yet been reflected in stock prices, some of these stocks, such as education companies, have begun to respond positively to improved earnings. Many companies have announced plans to buy back shares sitting on large amounts of cash. Larger cash positions allow companies to increase dividend payments. Both factors should have a positive impact on share prices.
Most promising sectors for investors
For investors, we think the best opportunities can be found in AI, travel and education, electric vehicle and battery makers, contract development and manufacturing names, as well as healthcare.
While the tech cycle shows signs of bottoming out in China, AI seems like a timely catalyst. Our portfolio is geared toward names that will benefit most from this rapid technological development, such as Chinese Internet names with AI exposure.
We expect secular growth in both travel and education driven by technological changes, which will have a positive effect on overseas test product providers and online travel platforms.
Among electric vehicle and battery makers, we stick with industry leaders with above-average profitability and technology leadership.
Contract development and manufacturing organization (CDMO) names across China, India and Korea are emerging as winners of Asia’s secular upsurge in health and biotech innovation. Against this backdrop, greater health awareness among the aging population increases the prospects of CDMO names and leading pharmaceutical companies.
Overall, 2024 looks to be a good year for the Chinese economy and specific sectors. As these improvements become apparent, we expect investor confidence in Chinese stocks to improve as well.
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