Out of the doldrums, into the green

DRIVEN by the Chinese government’s efforts to revitalise the economy, China’s stock market saw a significant rally starting in late September 2024, offering a sense of optimism after a prolonged period of stagnation. However, in early October, the market faced significant volatility, reflecting mixed responses to government stimulus measures. The surge, driven by bold but cautious government actions, included interest rate cuts and direct liquidity support for the equity markets, yet investor sentiment has been mixed. Recent announcements from China’s National Development and Reform Commission included a 200-billion-yuan (S$36.9 billion) spending plan, but the lack of detailed fiscal stimulus led to a mixed market reaction.

Despite these short-term ups and downs, the direction of travel is clear. Based on past experience, low valuations and extreme pessimism, combined with improving economic and corporate fundamentals in six to 12 months’ time, a bull market will be the natural order of things.

We believe a multiyear bull market has already begun in September, but the market would be volatile in the first phase of this bull run because there is still scepticism among investors, after having experienced several false dawns in the last two years.

Undervalued and poised for rerating

China stocks are currently grossly undervalued compared to global peers. The average price-to-earnings (P/E) ratio of companies listed on the Shanghai Stock Exchange was 12 times, considerably cheaper than the US or European or Indian markets, where P/E ratios hover between 20 and 30.

A major rerating would ensue if earnings recover, which we are expecting to begin in 2025 and beyond. We expect the P/E ratio to rise to 15 to 18 times, on earnings growth of 10 to 15 per cent per annum for 2025 to 2028 on a low base.

However, it is not realistic to expect all stocks will perform in this expected bull market, although the “high tide” had lifted all boats. Investors can look at industries that will power the new economy, particularly high-tech industries such as semiconductors, electric vehicles (EVs), electronic components, factory automation, satellite topography, and cybersecurity, which are distinct from internet and e-commerce industries.

Additionally, several key investment themes, including companies positioned to benefit from an economic recovery and cyclical upturn, those advantaged by local governments resuming orders and settling payables with vendors, and businesses relieved from anti-corruption pressures are interesting. There is also investment potential in firms engaged in share buybacks, discretionary consumption, and mergers and acquisitions.

Investors should focus on fundamentals

For investors, attempting to time the market can be challenging. However, China’s economic fundamentals, supporting fiscal and monetary policies and compelling valuations should make it a very attractive market for long-term investment. A diversified approach, such as investing in exchange-traded funds (ETFs) or actively managed funds with a strong long-term track record, can help mitigate the risks associated with individual stock volatility.

Hidden opportunities in bonds?

China’s bond market, the second-largest in the world, provides a rich hunting ground for yield-seeking investors. Corporate bond yields remain attractive compared to global benchmarks, and Chinese firms are expected to issue up to US$15 billion in overseas bonds in the fourth quarter of this year. The combination of stimulus measures and renewed investor interest is creating strong momentum in both the primary and secondary bond markets, which could provide a lucrative opportunity for investors looking to diversify their portfolios with fixed-income assets.

Clean energy, electric vehicles, semiconductors remain sectors to watch

China remains the world’s largest producer and consumer, and dominates the rapidly growing renewables manufacturing market, producing 90 per cent of all solar panels, over 70 per cent of all lithium batteries, and 65 per cent of all wind turbines. The country’s push towards renewable energy presents significant opportunities for investors, particularly in energy storage firms and EV manufacturers. China’s leadership in EV manufacturing has established it as a global frontrunner, and while the domestic market faces intense price competition between original equipment manufacturers, the long-term growth for EV component makers remains strong.

The semiconductor industry is another critical sector to watch. China is investing heavily in achieving self-sufficiency across the entire semiconductor supply chain. By 2030, the country is expected to hold nearly 40 per cent of the global market share in mature semiconductor products​. While China currently lags in advanced node semiconductors, heavy investments in recent years will continue to narrow the gap. Once China catches up, we anticipate that a significant portion of US semiconductor companies may experience financial challenges or face potential insolvency.

China in 2025 and beyond

As the economy and earnings recover in 2025 and beyond, China stocks should see significant returns. The sceptics (who are still quite plentiful) may choose to continue to watch on the sidelines in the first leg of the bull market. China’s economic fundamentals remain robust, particularly in the manufacturing and technology sectors, which have generated surpluses of US$700 billion year-to-date and US$4 trillion over the last five years, a fact that has been largely forgotten. The country’s manufacturing ecosystems, particularly in high-value sectors such as EVs and high-tech manufacturing, continue to either outpace or rapidly close the gaps with global competitors, positioning themselves for even better long-term prospects.

The government’s bold and resolute fiscal and monetary policies aimed at alleviating structural and cyclical challenges, such as issues in the property market and corporate debt, will boost business, consumer, and investor confidence. In short, betting on the top leadership’s policy commitment and clear direction of travel has seldom been a bad decision in China in the last four decades.

Derrick Tan is group executive chairman of Wrise Group; Wong Kok Hoi is founder and co-chief investment officer of APS Asset Management