China equities demand new playbook amid shifting dynamics

For institutional investors still watching China’s equity market, asset managers say it’s time to adopt a new playbook with active stock-picking, and more importantly, rely less on the property market as an indicator of consumer sentiment in the current climate.

William Fong, head of Hong Kong China equities at Barings, suggests investors abandon hopes for major government stimulus to revive the property market and instead seek new benchmarks and opportunities.

“People used to look at the property market as a gauge of consumer sentiments or even the economic growth. That’s the old way of investing,” Fong told AsianInvestor.

William Fong
Barings

“In the new way of investing in China, somehow people should treat the property market aside, as the correlation between the property market and consumption, or even the economic growth, should reduce going forward,” he said.

Fong believes the central government is “very unlikely” to stimulate the economy as it used to through infrastructure and property market boosts. Instead, it will focus on building a new economy driven by new technologies and green industries.

With over two-thirds of household savings invested in property, a slump in home prices has seriously impaired people’s purchasing power and investment appetite in China's retail-concentrated stock market.

If the property market remains flat, Fong expects consumer sentiment to eventually become less tied to it. “Instead, people should start to ask whether they believe in those new industries, like technology, industrial, green industry – whether they are big enough to create enough workforce and wealth for China’s economy.”

He thinks all headwinds have been well priced into today’s Hong Kong and Chinese stock markets, which trade “very attractively” versus historic ranges.

“But the Hong Kong market is even cheaper with higher dividend yields and lower absolute price-to-earnings ratio.”

Year-to-date, the Hang Seng Index has risen 3.8%, trading at a price-to-earnings ratio of 10, while the CSI 300 Index has slipped 3% with a multiple of 13 times earnings.

Barings tends not to bet on markets given the correlation between Hong Kong and mainland China stocks. Instead, it focuses on selecting the best individual companies.

ACTIVE CAN WIN

David Perrett

M&G Investments 

David Perrett, co-head of Asia Pacific equities at M&G Investments, also advocated for an active approach during China's economic downturn and prolonged equity market slump.

During these periods, investors can confuse recent historic poor performance as an indicator of future returns, becoming overly negative and ending up selling undervalued stocks, he noted.

“Such behaviour can create an excellent opportunity for disciplined bottom-up stock pickers as they identify stocks that have been sold down to valuations well below those justified by fundamentals,” Perrett told AsianInvestor.

During bear markets, the opportunity set is not tied to one or two sectors, but to the broader market, he said. Actively managed equity funds that invest in the whole Chinese market would be one suggested instrument.

BlackRock, as a major exchange-traded fund (ETF) manager, also roots for an active approach for asset owners and institutions that still want exposure to the Chinese market.

Belinda Boa
BlackRock

Belinda Boa, BlackRock’s head of active investments for APAC, noted that current policy support was not sufficient to change the macro backdrop, with continuous headwinds from falling foreign investments, real estate sector problems, deteriorating consumer confidence, an aging population, and geopolitical risks, among others.

“That being said, this is still a very deep, liquid market with a lot of names where you can make money. So, I think our approach has to be far more selective,” Boa said at a press conference.

“It's no longer just about getting beta by owning China but being selective in individual companies where we think can benefit from some of the themes,” she said.

GO THEMATIC

Elaine Wu
BlackRock

The themes for BlackRock’s equity investments include data centres powering artificial intelligence models, semiconductors, energy transition, and companies that will benefit from the rewiring of the global supply chain.

BlackRock’s institutional clients are looking at Asia and emerging markets investments at a more granular level, noted Elaine Wu, head of APAC investment and portfolio solutions at BlackRock.

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Amid the rewiring of global supply chain, investors want to lean more into single-country exposure, including India, Taiwan, and Korea, where inflows are going into the buildout of supply chains, she said.

Index-wise, Wu said there have been requests from clients to exclude China, with inflows into emerging market ex-China indices, which is also related to the rewiring of global supply chain.

Reiterating the active approach to investing in China, Wu said one way is to select companies with overseas exposure. “Specifically, thinking about leaning into Chinese names that have exposures to international markets, for instance, would be one way of going about the investment strategy.”