A woman rides a scooter beneath a large screen showing stock exchange and economy data in Shanghai on October 20, when Asian shares hit an 11-month low. Photo: EPA-EFE
Opinion
Macroscope
by Nicholas Spiro
Macroscope
by Nicholas Spiro
China stock market bulls aren’t just being contrarian
Despite concerns about China’s economy and markets, some prominent strategists and fund managers are optimistic about the prospects for Chinese stocks
There is a sense that the economy has stabilised amid the property sector’s struggles, Chinese shares are affordable and parts of the market have proven resilient
Another month, another batch of bleak data for China’s crisis-ridden residential property sector. Average prices for second-hand homes fell 0.8 per cent in November, the sharpest monthly decline since October 2014, while average prices for new homes in 70 cities dropped for the sixth straight month.
Investment in real estate development has fallen 9.4 per cent this year, while home sales have contracted for 18 of the last 22 months. In a report published on December 15, Nomura said that “while markets may have become somewhat desensitised [to] constant discussions related to the property sector, it remains the single largest drag affecting China’s economy”.
In China’s equity market, there are no signs of complacency whatsoever. The MSCI China Index, which tracks Chinese stocks listed at home and abroad, fell a further 14 per cent this year. This is its third straight year of losses following the peak of China’s equity and property markets in 2021.
Since the end of 2020, China has been among the worst-performing stock markets in Asia in US dollar terms, dragging down the region’s emerging market equities because of its dominance of the benchmark index.
The bar for a durable rally in Chinese stocks has not been this high in nearly a decade, mainly because of the loss of confidence in the all-important property market which has accentuated deep-seated problems in the economy and fuelled uncertainty about the path to achieving sustainable growth in a post-property boom era. “It’s clear something more structural is going on in China,” said Winnie Wu, chief China equity strategist at Bank of America Securities.
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Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
Yet despite significant concerns about China’s economy and markets, some prominent strategists and fund managers are relatively optimistic about the prospects for Chinese equities next year.
One of the reasons is the growing sense that the economy has stabilised while the crisis in the property sector is starting to abate. In a report published on December 11, S&P Global Ratings said it expects the housing market “to enter the final stages of market clearing next year”, with the recovery “starting with top-tier cities, followed by lower-tier cities”.
Some investors have taken comfort from Beijing’s more forceful response to the downturn in the property sector. Pressure on the government to find ways to help developers deliver unfinished homes is so acute that officials are considering allowing banks to provide unsecured short-term loans to troubled builders. Nomura believes that at some point next year Beijing “could play the role of lender of last resort, marking a real turning point for the property market”.
This is debatable. For markets, however, there is enough evidence to suggest the government is willing to do what it takes to expedite the delivery of pre-sold homes to prevent a full-blown collapse of the sector. “We now know where the government’s pain threshold lies,” said Frank Benzimra, head of Asia Equity Strategy at Societe Generale.
Another reason for relative optimism is the dramatic derating of Chinese shares. Societe Generale data shows that the forward price-to-earnings ratios of both the MSCI China Index and the China A-share market – publicly listed Chinese companies traded on Chinese stock exchanges – have suffered the steepest declines among the main equity gauges in Asia relative to their average levels during the past 10 years, along with Singapore’s stock market.
A third reason is that parts of China’s equity market have proved quite resilient, especially high-quality companies with strong earnings and higher return on equity. Morgan Stanley notes that the A-share market is better aligned with the government’s strategic priorities than the offshore market, benefiting more from “policy tailwinds” for high-end manufacturing, automation, the green economy and information technology.
The CSI 300 index of Shanghai and Shenzen-listed shares offers investors greater exposure to the technology and industrial sectors. Defensive state-owned enterprises, notably in the energy sector, have outperformed the rest of the market and have high dividend yields. Many leading Chinese firms that derive a large chunk of their revenues abroad have also fared better, Bank of America notes.
Catherine Yeung, investment director at Fidelity International in Hong Kong, said there was a disconnect between bearish sentiment towards China and the billions in southbound flows into Hong Kong this year via the Stock Connect scheme, underscoring the strong level of demand from mainland Chinese investors. “It’s an indication of growing wealth, and that wealth needs to find a home,” Yeung said.
Financial Secretary Paul Chan (left) and Hong Kong exchange chairman Laura Cha (centre right) strike a gong at a ceremony to celebrate the 30th anniversary of H-shares at Connect Hall of the Hong Kong stock exchange in Central on August 22. Photo: Yik Yeung-man
Much attention is being paid to new growth sectors in China’s economy that could help offset the drag from the downturn in the property industry. China’s thriving electric vehicle (EV) sector – especially the country’s predominance in batteries – has received the most attention.
However, to put things into perspective, the growth generated by EVs, battery production and wind and solar power generation combined would be insufficient to compensate for the drag from property-related activities, resulting in a net negative 0.5 percentage point impact on economic output between 2023 and 2027, according to Goldman Sachs data.
Still, the catalyst for the bull market in Chinese stocks in the second half of the previous decade was the transition from old growth drivers to new ones. Back then, it was low-end export-driven manufacturing growth that gave way to consumption-oriented growth, fuelled by China’s lead in digital technology.
Today, the forced deleveraging and downsizing of the property sector is meant to prepare the ground for advanced manufacturing-led growth. While rebalancing takes time and is fraught with risk, “it’s a necessary short-term pain,” Wu said.
At a time when sentiment towards China is pervasively bearish, taking a sanguine view of the country’s battered stock market might not be as contrarian as it appears.
