Despite stock market performances outstripping those of its developed world counterparts since the beginning of this century, volatility has remained higher. In contrast to US markets, Chinese equities are trading at levels below those seen, for example, in 2007 or 2015, leaving a number of investors in the red today. The trade war declared by Donald Trump in 2018 has only served to heap more fears onto those already existing. With the hiking of customs tariffs on USD 250 billion worth of goods, the economy has slowed over recent quarters and the government has had to respond with tough measures to stimulate economic activity. These fiscal and monetary measures have already begun to bear fruit, and are keeping investors optimistic about Chinese stock markets, which are becoming too big to be ignored.
According to various sources, China should, from 2030, retake its place as the world’s largest economy, a position it lost at the beginning of the nineteenth century as Europe went through the Industrial Revolution. After having played economic catch-up from 1980 after Mao Zedong founded the country’s Communist regime in 1949, China rolled out a raft of key education, economic and industrial reforms, which enabled it to become an ever more competitive and ambitious “socialist market economy”. According to the IMF, China’s 2017 per capita GDP stood at USD 16,000, a long way behind that of the United States (USD 59,000), leaving China with a lot of ground to make up. In the wake of US sanctions, the Chinese authorities have been both pragmatic and innovative for a country that is used to huge infrastructure projects. On the monetary front, the People’s Bank of China reduced banks’ reserve requirement ratios, freeing up more than USD 100 billion for the banking system to boost investment. Furthermore, the government reduced tax rates for individuals and medium-sized firms, enabling USD 200 billion to be used to stimulate consumption. These measures represent a level of capital injection that has not been seen in over ten years.
The economic upswing has started to be reflected in confidence indicators and increased lending by banks. It therefore looks preferable to steer investments towards equity markets rather than bond markets as long as valuations stay attractive. Renewed trade tensions recently sparked by President Trump have sent local stocks plummeting, providing an opportunity to buy Chinese equities as the country’s long-term economic trajectory remains intact. Despite President Trump’s voracious risk appetite, China still has the capability for monetary and fiscal responses. Investors looking for earnings growth would do well to take an interest in China, which offers a better outlook with valuation ratios lower than those in developed markets. The CSI 300 Index is trading at multiples of 11.7x estimated earnings, a level below that of the European and US markets. Despite this, estimates are higher in China (+13% over the next twelve months), in stark contrast with the United States (+5%) and Europe (+5%). At these levels, the index is trading at a slight discount versus its 10-year historical average, while upward earnings revisions and increased results are both expected. It is therefore looking interesting to have a large exposure to Chinese equities, in particular those in the consumer goods and Internet sectors, which will be big beneficiaries of the measures that have been announced. Developed country names, for example luxury goods companies and the commodities sector, rely on China for a significant part of their revenues, and these names are set to benefit from an economic upswing in the region and should thus also be favoured by investors.
Nicolas Laroche
Global Head of Advisory Investments