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China stocks emerged as the best-performing stocks worldwide, but can the China equities outlook remain that bright?
In the first half of 2024, China faced different hurdles, navigating a challenging global landscape and ongoing changes in its domestic structure. Despite these hurdles, GDP grew by 5.0% year-over-year in the first six months of the year, achieving the target set at the Two Sessions earlier in the year. This growth was largely supported by strong export performance and government-led investments in key sectors such as manufacturing and infrastructure. However, domestic demand showed signs of weakness in Q3, and the property sector’s ongoing struggles continued to weigh on consumer confidence.
“China is struggling to gain momentum as consumers and homebuyers remain cautious,“ Fidelity International commented in late September. “With just three months to go until the end of the year, the country’s around 5% annual GDP growth target looks challenging.”
China has recognised the challenge and launched a stimulus package in late September. It included $113 bn of liquidity support for the nation’s stock markets, spurring a sharp rally in equities, making them the world’s best performers.
Chinese equities were up by 21.9% in the third quarter and up 14.7% in the final week alone, Skagen Funds noted. According to Bank of America data, the rally added nearly $2 tn in market value in the last week of September alone.
However, analysts are wondering whether the Chinese equities outlook remains so bright.
“Despite the recent rally, Chinese stocks also remain undervalued versus long-term average multiples of earnings and book value. Any broadening of the recent stimulus to support households would likely have big ramifications for China’s unbalanced economy and drive a more structurally positive rally,” opined Alexandra Morris, Investment Director at the Scandinavian mutual fund company Skagen.
Pictet Asset Management remains cautious about China. “For one thing, China’s problems run deep and need structural change rather than the sort of short-term fixes being offered,” an October market outlook reads. “While domestic equities have reacted strongly to recent monetary measures, the sustainability of the rally depends on the implementation and follow-through from the authorities.”
China equities outlook: “intriguing value proposition”
According to the Franklin Templeton Institute, the Chinese equity market represents an “intriguing value proposition”. “In the nearly 15 years since January 1, 2010, the SSE Index is down 3.5%, while the S&P 500 Index is up 391%. The average price-to-earnings ratio on China’s mainland Shanghai index is 12.3 times compared with the S&P 500’s multiple of 27.5,” Stephen Dover, Chief Market Strategist and Head of Franklin Templeton Institute, commented.
He pointed out that low multiples alone do not assure high returns. “Cheap can remain cheap. In our view, what is instead required is a catalyst to shift investor attitudes from the justification of low multiples to the possibility of something better. We believe China’s high-profile commitment to buttress its economy is just that type of catalyst,” Dover added, suggesting the time might be right for investors to increase their exposure to Chinese equities with mutual funds or ETFs.
UBS’s Chief Investment Office emphasises that the full scope, scale, and implementation of China’s stimulus remain uncertain and, therefore, affect the China equities outlook. ”From a growth perspective, a fundamental turnaround will likely require additional fiscal support for the property market. Past equity rallies, as in May 2023, have fizzled out when key stimulus or policy changes failed to match their initial promise.”
UBS suggests that investors who want to add exposure to Chinese equities should focus on growth via leading internet and consumer names.
“Key internet platform players have shown strong margin improvements in recent earnings releases and should continue to do so, in our view,” an end-of-September insight said. “Should consumption begin to turn around given the stimulus efforts, that should also result in top-line upside for leading names in the internet sector.”
