China assets back in favour amid low valuations, Beijing's vow to support economy

STRATEGISTS and some asset managers have pivoted towards a positive stance on China assets, citing attractive valuations and the China government's avowed intention to support the economy at a time when some global central banks have turned hawkish.

Capital outflows out of China assets, however, intensified in the weeks following Russia's invasion of Ukraine, leading some to question whether China's initial apparently equivocal stance towards the invasion prompted a reckoning, against the backdrop of the pursuit of environmental, social and governance values in investments.

The Institute of International Finance notes "unprecedented capital outflows'' out of China, beginning in late February after the invasion of Ukraine.

Said IIF in its global macro views newsletter on March 24: "At this stage it is too early to say if the war is driving outflows or if other factors are to blame. But we think these outflows are notable enough to at least raise the possibility that Russia's invasion of Ukraine may be pushing global markets to look at China in a new light.''

IIF says one constant through all the ups and downs of recent years has been capital inflows into China as investors slowly built up their exposures, even through China-specific actions like US tariffs and the early stages of Covid. Investors remained under-exposed to China, which makes the current outflows "notable'', particularly as inflows into non-China emerging markets have remained flat, it said.

EPFR Global also notes that the steady inflow into China assets since September 2021 until early March "hit the buffers''. In the third week of March, redemptions from China equity funds hit their highest level since the first week of 2021 and outflows from China bond funds exceeded US$1 billion for the first time.

Its first-quarter report found that Asia ex-Japan funds dedicated largely to China attracted the biggest share of money, mostly from institutions. Retail inflows into China equity funds were lacklustre.

Some strategists took heart from a column by China's ambassador to the US, Qin Gang, published in the Washington Post on March 15. China, he wrote, is committed to an "independent foreign policy of peace''. "Conflict between Russia and Ukraine does no good for China. Had China known about the imminent crisis, we would have tried our best to prevent it.''

China's capital markets have been rocked by a number of developments since 2021, which spurred investors to question whether China remained investable. These included regulatory crackdowns on technology companies and "common prosperity'' sectors, and debt issues in the property sector.

China equities suffered another blow in March when the US Securities and Exchange Commission named 5 Chinese companies listed in New York as the first of many that may be delisted, pending submission of their audit documents.

On March 15, the MSCI China Index plunged as much as 30 per cent. This has since moderated, thanks to reassurance by Chinese Vice Premier Liu He that measures would be taken to stabilize markets. In the year to April 1, the index is down about 13 per cent, compared to the MSCI Emerging Markets ex-China index at minus 4 per cent.

In 2021, the MSCI China index was a laggard, with a loss of 22 per cent, compared to the MSCI Emerging Market Index loss of 2.2 per cent, and the MSCI All Countries World Index's gain of 19 per cent.

BlackRock Investment Institute said in its weekly global commentary: "We stay moderately overweight Chinese stocks as we see a shift to easier policies across the board. China's ties to Russia have created a geopolitical stigma risk that could pressure some investors to avoid Chinese assets.''

In March, Credit Suisse pivoted from "neutral'' on China earlier in the year to overweight. John Woods, chief investment officer for APAC, said value in China has begun to emerge. As at mid-March, 12-month forward price-earnings multiples stood at 10 times, compared to 18 times in March 2021. "At current levels, PEs are well below their 5- and 10-year averages of 15 and 12 times, respectively.''

He said analysts are raising their 2022 earnings estimates for the MSCI China Index by 3 per cent. "Though earnings are likely to be revised down in the short term as rising COVID-19 cases and lockdowns restrain the recovery and company profitability, the authorities' focus on growth stability and modest policy easing should help Chinese equities deliver positive earnings growth this year. As such, we have the signal we need to move to an overweight allocation for China equities.''

UBS expects China to outperform Asia and the emerging markets in the coming months with "mid-teen percentage returns'' this year. "For longer-term investors who hold less than our recommended strategic allocation to China, we think this should be a potentially good time to build up exposure.''

Bank of Singapore head of investment strategy Eli Lee said: "While near-term volatility is likely to continue, we see long-term value in Chinese equities. We maintain our overweight stance on Chinese equities on the back of a policy easing bias, depressed valuations and relatively light positioning. The onshore A-share market remains our preferred market owing to its more resilient domestic investor bias and better positioning to benefit from further policy easing.''

DBS has upgraded Asia ex-Japan equities for the coming quarter, and also turned positive on China. "... we expect supportive policy measures to come through which will ease market instability and lift sentiment surrounding China equities.'' It expects government measures to lift the uncertainty overhang in the key areas of property development and the Internet, new economy and "common prosperity'' sectors. It also expects bilateral discussions with US authorities to resolve audit and delisting issues; and a gradual adjustment of its zero-Covid policy to cushion the economy, among others.

Schroders remains cautious, however. In a column, Abbas Barkhordar, Schroders Asian equities fund manager, said that the China government's announcements were mollifying but vague. "Without a crystal ball (or rather a source close to the powers that be), there is little insight we can add on the timing or extent of such regulatory changes, however, as they are driven by political considerations above all else.

"As investors, we buy companies, not countries... We seek companies with strong governance and the ability to earn returns sustainably above their cost of capital. Fortunately, Asia offers no shortage of such stocks, across many geographies and industries, some of which have been caught up in the market weakness offering good buying opportunities.''