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The last year has been quite a volatile period for investing in China stocks. The equities that touched their peak in 2021 have lost over 50% until the end of 2023, according to the MSCI China Index. Last calendar year, the index slumped 11.20%.
This decline is a result of a slow post-pandemic recovery and the real estate debt crisis, denting investor confidence. All of this caused foreign investors to dump their Chinese stocks leading to a major decline in the stock prices. As per Robeco, up to $100 bn has been withdrawn from China in 2023.
Low valuations a good time to buy?
With the China stocks trading at lower valuations, many investors are planning to increase their Chinese holdings. A survey by Bloomberg saw nearly 33% of the respondents willing to increase their China investments in 2024 and only a fifth planning to cut them.
Several asset managers also suggest it is a good time to pick some quality stocks. “Rather than seeing this as a crisis, we continue to take a constructive view that this is a long-term buying opportunity for active investors with local market knowledge seeking exposure to some of the world’s best companies,” opines Robeco.
Fidelity International suggests picking companies with strong business and competent management. The asset manager also emphasises buying stocks with a margin of safety. Fidelity is upbeat on the consumer space, particularly retail chain drug sellers or the lesser-explored dairy and sportswear industries. It is also positive on oil and commodities in the medium term.
Notably, some asset managers even believe that the negativity surrounding China is exaggerated and doesn’t justify the stock price declines.
Oaktree Capital says, “We believe Chinese equities are pricing in more than today’s negative news but also an extremely pessimistic outlook that we do not share. With Chinese equity valuations close to 10-year lows, we believe value investors could now acquire assets at a significant discount to their fundamental value.”
According to Oaktree, the pessimists are only focusing on the current weakness and fail to see that China continues to play a significant role in the global supply chain and economy.
Cheap stocks are not without inherent risks
Though valuations look compelling, the weakness in the macroeconomy cannot be overlooked while picking stocks. In October 2023, Morgan Stanley strongly cautioned against buying Chinese stocks at a dip citing property sector risks. “Cheap valuations, however, have failed to be enough of a reason to buy Chinese stocks in the recent past,” the investment bank stated.
However, in a podcast this December, Laura Wang, Morgan Stanley’s Chief China Equity Strategist acknowledged that there are a lot of growth investing opportunities. “There are still plenty of alpha-generating opportunities and particularly high-quality names in the growth categories who can offer strong earnings and ROE track record, good management teams, and limited reliance on foreign technology input or domestic government policy support,” elucidated Wang.
For the bargain-hunting investors in the Chinese market, economists recommend keeping a watch on fundamental improvements in the economy and waiting for adequate stimulus measures by the government.
At the same time, JPMorgan offers a more sector-specific outlook. The bank says Chinese internet stocks are undergoing a correction and are trading near the last October lows, but its earnings visibility into 2024 remains reasonably high.
On the other hand, JPMorgan adds, “Given the lack of new measures, we stay cautious on the property sector until we see a meaningful improvement in developers’ liquidity condition and/or primary sales.”
