Malloy backs companies listed in China such as Alibaba, Kwaisho Technology and Baidu.
Among the ASX 200, UBS has identified 35 „China plays”. The list is dominated by resources companies, but also includes a strong representation of stocks in the food manufacturing (Crancorp, A2 Milk and Clover) and transport sectors (Airport Hub, Qantas, Brambles and Gellison Group).
China is playing
UBS analyst Richard Schellbach calculates that the average ASX 200 stock is now 11.3 per cent cheaper than it was before the COVID-19 pandemic, based on the average price to earnings (PE) investors are paying for the shares. But the average stock on the „China play” list is trading at a 16 percent discount.
Under strict Chinese President Xi Jinping, there has been no massive financial aid to households and businesses during the pandemic.
Shares in ASX-listed iron ore miners traded sideways or worse as hopes of a major increase in Chinese infrastructure spending faded.
But there have been several announcements since July from the Chinese government and the Communist Party that will encourage spending on consumer goods and cars, encourage private companies to expand investment and make it easier for businesses to get financing.
Whether the measures will work remains to be seen and the extent of China’s economic slowdown will be further exposed this week as Chinese companies report their earnings.
According to Frontier Advisors consultant Brad Burgis, giant US mutual funds’ exposure to China-listed stocks has fallen 50 percent since March 2021 and is now at historically low single-digit levels.
„Given the muted flows in Chinese stocks and emerging markets more broadly over the past few years, there has been significant under-ownership (relative to rankings) by global and emerging market equity funds,” he says.
He notes that a shift in US investor appetite for exposure to Chinese stocks could have dramatic implications for Australian investors.
„If there is a sustained economic recovery or a thaw in geopolitical tensions, there is a risk that Australian investors will have lower allocations to China and emerging markets will lag, should US and global investors decide to meaningfully allocate to this part of the market again.”
Will Main, portfolio manager of Asia and emerging markets at Maple Brown Abbott, said much of the disappointment in China’s post-pandemic recovery is already reflected in stock valuations.
Two-speed China
„On a risk-reward basis, the China opportunity looks attractive,” he says.
The Chinese stock market trades prominently with a forward earnings multiple of over 21 times applied to stocks in India with a forward earnings multiple of around 10 times.
„As the impetus for a more fiscal response grows, we expect more progress in China’s so far elusive recovery in the second half of 2023,” Main says.
Lewis Cave, strategist at global research firm Cavell, writes that China already has signs of a two-speed economy, with the services and high-end consumer goods sectors outperforming the sluggish property sector.
Global luxury brand LVMH, one of many European brands favored in China, illustrates the point.
Its shares have risen 13 percent so far this year, making it the world’s 15th most valuable company.
„Wealth creation in China has been epic over the past generation,” Cave says. „Thirty-something, high-income single women are buying luxury goods for themselves, and they’re buying cosmetics.”
Investment themes such as travel, luxury goods and electronics will all continue to perform well, says Cave.
This theme is welcome news for ASX listed companies.
The most obvious example is Treasury Wine Estate, producer of the Penfolds label.
Treasuries have rallied since China announced it would drop 80 per cent tariffs on Australian barley, fueling hopes that punitive tariffs on Australian wines could also be dropped soon.
Travel, flowers and cars
Two senior industry officials told Field Research (a consultancy where the author is a director) that they believe the process to remove tariffs on Australian wine exports is six months behind the barley process.
Premium infant formula seller A2 Milk could be a long-term beneficiary, even as it warned this week that economic conditions in China were challenging.
Marketing expert Chris Flahey says the opportunity for Australian baby formula companies in China is strong as the year of the Dragon birth rate approaches.
„The reason the volume of Pubs, Bellamy’s and A2 has gone down is because of the logistical challenges with Covid – the love for the brands is still there,” he says.
„Those Chinese mothers still want great products, and once they have the opportunity to start buying again — they’ll take that opportunity.”
The foreign exchange for China story on the ASX is everywhere.
Importers of ASX-listed commodities from China are engaging in meaningful product price deflation and the opportunity to drastically reduce freight costs to get those imports into the Australian market.
Could the number of international students coming out of China rebound faster than expected?
Shares of small-cap flower grower and marketer Lynch Group have risen nearly 60 percent so far this year as it reported strong demand for its products in China.
Who knew that the prospects for 4×4 parts manufacturer ARB in the US market were materially strengthened by the punitive Trump-era tariffs that still apply to 4×4 parts imported into the US from China?
The company told shareholders this week that tourists from China will „provide current opportunities” for travel company HelloWorld.