Chinese Equities: The month of February in review

Highlights in this article reveal:   

• • A more favourable environment is emerging for Chinese equities.  

  • How China’s growth issues are largely self-imposed. 

  • That investor sentiment is changing. 

After a prolonged three-year downturn in the Chinese markets, it appears that the worst is now behind us. A recent research report from Alpine Macro argues that a more favourable environment is emerging for Chinese equities. We have summarised some key points, along with our own observations. 

Chinese equities are currently trading at depressed valuation levels. These price levels already factor in various risk factors (arguably more than adequately) and imply a significant decline in growth. It may come as a surprise to readers that cyclically adjusted P/E multiples in China have fallen to levels similar to those of US equities during the Great Depression. However, the economic conditions were vastly different, with the US economy nearly halving between 1930 and 1933, and the banking system almost fully collapsing. China’s current situation is nothing like that. We believe Chinese stocks have overly discounted an extremely negative outcome that is highly unlikely to materialise. 

China’s growth issues are largely self-imposed, as the Chinese government initially refrained from adopting aggressive stimulus measures to promote economic transformation. However, following the market sell-off in January, authorities have acknowledged the importance of stimulating both the stock market and the broader economy. 

In recent weeks, we have observed a coordinated effort to rescue the stock market, purchase China ETFs, alongside balance sheet expansion, unexpected cuts to reserve ratio requirements, and a key lending rate by the central bank.

We anticipate further policy actions aimed at supporting the targeted economic growth rate of 5.2% for this year.

The Chinese economy continues to grow at a moderate pace, despite weaknesses in the property sector, and is not as dire as often portrayed in Western media.

Notably, there are structural bright spots within the Chinese economy, such as the new energy and semiconductor sectors; we have also recently witnessed positive surprises in some other parts of the economy, including consumer credit demand, industrial output, and exports.

It’s important to remember that much of the commentary focuses on relative growth – that is growth relative to China’s own history or relative to targets – whereas in absolute terms, the GDP expansion, even at current levels, is enviable for many countries. 

For further insights from the RisCura team, download the full report. 

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