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The Chinese equity market shows an intriguing disparity: It has seen underperformance despite the country’s GDP growth of 5.2%. Jian Shi Cortesi, Investment Director at GAM Investments, emphasises in a recent market view that “this divergence challenges the conventional wisdom that stock market returns correlate directly with economic growth”.
“The US has a GDP growth rate of 2.5%, European GDP grew by a modest 0.6% last year, Korea experienced a 1.4% GDP growth, and India’s robust economy surged with a remarkable 7.3% growth. Surprisingly, despite China’s GDP growth of 5.2% over the same period, its stock market declined by 11%,” Shi Cortesi says. The other markets mentioned achieved more than 20% returns.
Shi Cortesi suggests that the interplay of demand and supply reflects the prevailing pessimism about China’s prospects rather than fundamental economic weaknesses driving the downturn.
In the insight, GAM also highlights China’s role in the evolution of the global manufacturing landscape. While companies increasingly shift their production facilities out of China, the country stays resilient. “It is shifting the focus to higher value-added industries, technology, innovation and advanced manufacturing,” says Shi Cortesi.
According to GAM, China now stands at a crossroads. India is on an upward trajectory, and Japan’s stock market is booming. However, the Swiss asset manager thinks India’s rise does not necessitate China’s decline; it could indirectly benefit China. “As India’s manufacturing sector flourishes, its citizens gain purchasing power. These empowered consumers can then buy TVs, smartphones and cars made in China,” Shi Cortesi opines.
The investment director further addresses concerns about China facing a ‘Japanisation’ scenario of prolonged low growth and deflation, pointing out the significant differences in their economic stages and contexts. “Assuming that China will inevitably mirror Japan’s path oversimplifies the intricate tapestry of their economic journeys. As the curtain rises, we witness a nation navigating uncharted waters, a story distinct from any that came before.”
