Pimco, JPMorgan gear up for long winter in China markets
THIS was supposed to be the year that China’s economy roared back to life and, in the process, turned the country’s stocks and bonds into must-buys for global investors once again.
Ten months in, the reality is far different. Chinese stocks are among the world’s worst performers, investors are yanking money out of the country at the fastest pace since 2015, and the yuan is hovering around a 16-year low as a real estate crisis ripples through the economy and offsets the momentum gained from the long-awaited pandemic reopening.
The sell-off has caught even the most-seasoned investors off guard, forcing them to retool their approach to fit Beijing’s new economic model. Policymakers are no longer pursuing growth at all costs and have little appetite for bailing out ailing property developers; crackdowns have doused entrepreneurial spirit; and the country’s rift with Western nations shows few signs of easing.
Investing in China has never been easy, but money managers now face layers of added complexity that require deft manoeuvring. Here is how some of the biggest investors, along with noted China watchers, are navigating the changed landscape.
Justin Thomson, T Rowe Price
The chief investment officer for international equities believes the “best investments are made just as you are feeling most uncomfortable” – a principle he applies to Chinese markets.
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While some clients are asking to exclude China from their portfolios due to geopolitical, macro and regulatory risks, “this negative sentiment provides a contrarian investment opportunity”, he said.
“The issues surrounding the Chinese property sector are structural rather than cyclical, and will cast a long shadow over the economy, meaning growth rates will be lower than previous decades,” he said. Still, “investors should not make the mistake of conflating economic growth with equity market returns”.
The quality of supply chains in many sectors means China will remain the manufacturing base of choice for many multinationals, while its lead in battery tech and electric vehicles shows the auto industry has the potential to go global.
“As valuations remain low and sentiment hits an extreme, investor interest will return to China as it has in past cycles.”
George Efstathopoulos, Fidelity International
The portfolio manager for the Global Multi Asset Income Fund says those who left China will come back once earnings start to be revised upwards, adding he is “cautiously optimistic” over the prospect of corporate performances in the next couple of years.
“China used to be kind of the lower-end sort of manufacturing hub. Now it’s the batteries and EVs,” he said. “Opportunities are changing.”
Another important aspect to watch is how households’ excess savings are unlocked to drive a sustainable recovery in consumption-related earnings.
“As and when that happens, that leads to a return of investors into China at a time when valuations are very, very cheap,” he said.
Joyce Chang, JPMorgan
The chair of global research says China’s inclusion in major indices a few years back was an important milestone in attracting passive investment, but the country is not a “mainstream holding right now” as half of those flows have exited.
“It wasn’t just a cyclical phenomena, but for many investors a structural story,” she said. “This year we think the government will exceed the 5 per cent growth target with the recently announced stimulus measures, but growth could decline to around 3 per cent at the end of the decade.”
The amount of scrutiny that China investments face from US authorities, along with an overall rise in industrial policy in developed economies, has also become an issue.
“If fund managers, particularly public pension funds, feel like they are going to get called by members of parliament or subject to a level of public scrutiny or board scrutiny, that makes it more challenging,” she said of the problems that foreign investors face in buying China assets.
There are also more alternatives to China that investors did not have when benchmark interest rates were pinned close to zero across much of the world.
“If you’re not a dedicated fund – you’re kind of saying there are other things that I can do right now, given the rise in yields in the developed market,” she said. “China government bonds no longer offer the yield buffer given the surge in US Treasury yields.”
Stephen Chang, Pimco
The managing director and portfolio manager for Asia fixed income says Pacific Investment Management Co has lowered its China credit allocation from a few years ago, as appetite soured amid turmoil at major developers and issuances dried up.
“We have become more defensive and more selective, have lower allocation compared to the benchmark, and are conservative with individual bond sizing,” Chang said. Among distressed developers, “recovery value is difficult to assess, and it is challenging to predict when the housing market will recover”.
Even when Chang sees opportunities in areas like medium-risk private enterprises or non-housing sectors where valuations are cheap, he would only “take a stab with adequate buffers in place”.
He called for caution against some sectors that may be deemed sensitive by the US in the future, like what it has done with semiconductors and artificial intelligence. “We would demand extra yield premiums for companies with those kinds of risks.”
Jason Pidcock, Jupiter Asset Management
The fund manager for the Jupiter Asian Income fund expects short bouts of rallies, but none that will last in a sustainable manner.
“We don’t think there’s a lot the government can do to stimulate the economy apart from perhaps countenance a currency devaluation,” he said. “But that risks retaliation in terms of tariffs going up by other countries.”
The government’s default action in the past has been to beef up infrastructure stimulus, but the dilemma now is that the country may have more road and airports than it actually needs.
Building more of those “might create a very short-term sugar rush, but it doesn’t really feed through into making the economy even more productive and therefore lead to sustainable economic growth.”
China’s stock market has often struggled over the past decades when the economy was outperforming the global average, so when the consensus is that growth will slow from here – “it is going to be even harder for the stock market”.
Thomas Taw, BlackRock
The head of APAC iShares investment strategy says while there may be some tactical trading opportunities over the coming months, a long-term overweight on China will be harder to justify.
Investors view China as “more of a trading market and one that they do not want to be overweight in the long term because growth is going to continue to slow over the coming years,” he said.
“China is no longer the power source of Asian growth. That’s moving more towards India and places like Indonesia and possibly even Malaysia.”
Short-term opportunities will depend on what the People’s Bank of China (PBOC) does to stimulate the economy. “The analysis is that the PBOC hasn’t done enough,” he said. BLOOMBERG
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