A sea-change in sentiment towards Chinese equities over the past three years has led to the market trailing in the dust relative to its regional counterparts.
According to FE Fundinfo data, the MSCI China index is down an eye-watering 50.4% since January 2020 to time of writing (31 January), while the MSCI All-Country World index is up 30.8%. In fact, its three-year losses have dragged on longer-term performance, with the MSCI China having fallen by 26% over five years and only achieving 37.6% returns during the last decade.
Had an investor held an S&P 500 tracker over the past five and 10 years, they would have achieved respective gains of 89.6% and 257.5% in sterling terms. This means the market is undoubtedly cheap relative to other stockmarkets and its own history. A recent report from Allianz Global Investors though shows that, while earnings were negative in both 2021 and 2022, they turned positive in 2023.
It is also significantly under-owned by investors on a long-term view, with research from Bentley Reid showing that Chinese stocks represent less than 3% of the FTSE All-World, despite being the world’s second-largest economy with $18trn (£14.22trn) GDP.
See also: Will the Year of the Dragon reignite investors’ interest in China?
However, in the month of Chinese New Year, is now the time for investors to buy into a bargain, or is the country’s backdrop too risky to consider? The headwinds facing China’s economy, political backdrop and stock market are multi-faceted.
Dr Baroness Dambisa Moyo, economist, author and co-principal at Versaca Investments, tells Portfolio Adviser: “There’s no doubt about it, most western investors are spooked by China – whether it’s because of regulatory announcements and proclamations, or geopolitical fissures – there is generally a mood music to the region. You have to weigh this against the fact it is a large economy with lots of tentacles around the world when it comes to trade.
“But, the country is facing difficult situations – there could be significant geopolitical clashes. It is so unbalanced. People have seen the macro figures and they have taken their money out.”
Safe as houses?
One major challenge the country has faced is its ailing property sector, with housing sales tanking since 2021 after the government began to crack down on overleveraged property developers. The posterchild for this has been behemoth property developer Evergrande, which was finally ordered to liquidate by a Hong Kong court on 29 January this year after it became unable to restructure its £236bn debt burden.
Given the property sector accounts for 22% of China’s GDP, and for almost 70% of Chinese households’ total wealth, its malaise is serious.
See also: Janus Henderson selects Victoria Mio as head of greater China equities
Sharukh Malik, manager of the Guinness Greater China and China A Shares funds, says: “Falling property prices and activity is leading to a negative-wealth effect. Households and businesses are less confident, meaning while the Chinese economy is growing, it is not growing as fast as expected.”
Oliver Jones, Rathbones’ head of asset allocation, describes the ongoing slump of the country’s
property sector as “the single biggest factor behind China’s weakness recently”.
To read more, visit the February edition of Portfolio Adviser Magazine
