Six months after abandoning a hot China recovery trade, Taosha Wang is poised to dive back in.
Encouraged by clear growth support signals from Beijing, increased stimulus for embattled developers and attractive equity valuations, the portfolio manager for Fidelity International is scouring for opportunities again.
“We are looking to increase our exposure in a measured manner,” Wang, who helps manage the $1.5 billion Global Thematic Opportunities Fund, said in an interview. “It has become clearer to investors that economic growth is once again firmly a policy priority.”
Wang is among a growing band of global fund managers who are calling time on this year’s relentless selloff in Chinese assets, which has seen $1.6 trillion wiped off mainland stocks since early February. The excessive pessimism that hammered everything from stocks and the yuan to corporate bonds has run its course, they say, paving the way for a market turnaround as policymakers finally take firmer action to revive the economy.
Recent gains in asset prices have emboldened such views. The yuan is headed for its best month of the year after rebounding from a 16-year low against the dollar while a Bloomberg gauge of Chinese investment grade credit is at its highest in 20 months. The Hang Seng China Enterprises Index is set for the smallest monthly drop since July.
Bullish sentiment is creeping back in, without the euphoria that swept Wall Street a year ago. China’s Covid reopening rally at the end of 2022 flopped in just three months, handing investors a pricey lesson on the unpredictability of markets once considered a core part of any global portfolio.
For much of the year, Chinese stocks were among the world’s worst performers. Investors were withdrawing money out of the country at the fastest pace since 2015, with JPMorgan Chase & Co. saying many no longer consider China a mainstream holding. A yearslong real-estate crisis, regulatory crackdowns and the nation’s rift with the US had led to a re-evaluation of its long-term growth prospects.
But one by one, money managers are sensing a turn in the tide.
Support for the property sector is getting more forceful with the aim of easing developers’ funding woes, while consumption to corporate earnings show the worst for the world’s second-largest economy has passed. And with the yuan facing tailwinds from a weakening dollar, bulls believe the market is at an inflection point.
The latest Bank of America global fund manager survey shows less concern over China’s real-estate crisis. Despite this, betting against Chinese stocks remains the second-most crowded trade — a mismatch some investors are now looking to exploit.
The MSCI China Index trades at 9.4 times their projected earnings for the year ahead, roughly half the level commanded by the S&P 500 Index. That follows a protracted downdraft in Chinese stocks, with the MSCI gauge set for a third annual loss. The S&P 500, meanwhile, has gained by double digits this year.
“At these kinds of valuations, I’m very happy to see out some of the shorter term volatility,” said Nicholas Chui, a portfolio manager for Franklin Templeton’s marquee China fund.
The fund’s return has tumbled alongside the broader market, but the drop means it can selectively target growing companies at a compelling price, according to Chui. “It’s allowed us to take a longer-term view and to take advantage of longer-term themes at a discount.”
The fund had Tencent Holdings Ltd, Alibaba Group Holding Ltd and Baidu Inc among its largest holdings, according to the fund’s fact sheet as of end-October. It has lost about 17% this year during the period in dollar terms, the statement showed.
Yuan Support
Seasonal momentum is also on bulls’ side. Chinese stocks tend to rise through November to January, with the yuan also getting a year-end boost as exporters need more local currency to meet cash demand.
Analysts at institutions including Guotai Junan International and Australia & New Zealand Banking Group see the currency strengthening to near the crucial 7-per-dollar level, recovering most of the losses incurred in 2023.
But even among China optimists, there is less conviction over how strong and sustainable of a rally they expect. The emerging consensus is that while assets may rebound from here, returns will be lower than before as perennial tensions with the US and President Xi Jinping’s grip on the private sector will temper financial market gains.
All things considered, Chang Hwan Sung, a portfolio manager for Invesco Ltd’s investment solutions business, believes it’s difficult to have an underweight position on China.
“Given dividend yield and valuations, there is not much downside,” to owning Chinese shares, said Sung. He is also bullish on dollar-denominated corporate debt issued by the country’s tech and industrial companies, holding an overweight position on investment-grade notes while still shunning the high-yield market dominated by developers.
China’s investment-grade bonds have gained 4.3% this year, on track to end two consecutive years of losses, according to a Bloomberg index. Securities issued by major tech giants and industrial firms are among the best performers. A dollar bond sold by a unit of Xiaomi Corp maturing in 2051 returned roughly 18% this year, while Lenovo Group’s note due in 2032 has generated about 13%.
The country’s junk dollar bonds, mostly issued by struggling developers, have fallen more than 12% in the period.
Among China’s investment-grade cohort, “we prefer the China BBB tech sector such as Weibo, Meituan, and Xiaomi, which have solid fundamentals with good cash flow,” said Chris Zhou, a portfolio manager for Ping An of China Asset Management (Hong Kong) Co. The government’s stimulus measures will give the securities a further boost, with an overall shortage of supply for offshore notes a key reason to remain optimistic on gains, he added.
--With assistance from Wenjin Lv, Pearl Liu and Dorothy Ma.
(Updates with Templeton fund performance.)