Global fund managers are pinning their hopes on China’s upcoming political meeting to resuscitate a rally in the nation’s stocks, expecting pro-growth policies to drive a second leg of the reopening trade.
(Bloomberg) — Global fund managers are pinning their hopes on China’s upcoming political meeting to resuscitate a rally in the nation’s stocks, expecting pro-growth policies to drive a second leg of the reopening trade.
The National People’s Congress in March may prove to be the next catalyst, with abrdn plc and Fidelity International seeing China’s leadership displaying renewed determination in supporting growth. The consumer sector will be a key beneficiary, they say, as more than $800 billion of pandemic excess savings and a recovery in income will fuel private spending.
“I don’t think the reopening has been fully priced in at this point,” Elizabeth Kwik, abrdn’s Asian equities investment director, said in an interview last week. “In the coming months, especially with the upcoming two sessions, we expect to see more supportive policies” in the form of consumption stimulus and more relaxed real-estate measures, she said.
The breathtaking rally in Chinese stocks since the start of November has hit a wall in recent weeks, prompting investors to debate whether the reopening momentum has run out of steam. While bulls see the downturn as a blip, skeptics say that gains are likely to slow given that a bullish position in the shares is now the world’s the most crowded trade.
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Victoria Mio, Fidelity’s head of Asia Pacific equity research, is looking to next month’s NPC for “pro-growth policy direction and pro-private-sector policy environment.”
The congress meeting typically sets the tone for major economic policies and during last year’s gathering, Beijing outlined an aggressive growth target while laying the ground for more fiscal stimulus.
If the March meeting disappoints, there’s a risk that Chinese equities may lose further ground. The rally has already shown signs of wear, with the MSCI China Index having fallen more than 8% since reaching a peak in late January and the Hang Seng China stock gauge on track to enter a correction.
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Consumption will play a pivotal role in the recovery, according to abrdn’s Kwik, who sees potential growth in local brands that are lesser known by foreign investors.
“We see an increasing trend of Chinese consumers willing to try out Chinese brands,” said Kwik, who holds overweight positions in the consumer, healthcare and tech sectors as part of a team that oversees the $3.7 billion China A Share Sustainable Equity Fund.
Increasing tensions with the US, as well as an improvement in the quality of local brands, are driving that preference, she said. Kwik’s fund, which has returned 6.9% so far in 2023, has baijiu maker Kweichow Moutai Co. and duty-free shop operator China Tourism Group Duty Free Corp. as its top two holdings.
Fidelity’s Mio, who co-manages the $920 million Greater China Fund that’s up 9.5% year to date, has consumer discretionary as the fund’s biggest sector allocation. Job seekers flocking to cities after reopening will boost incomes and help bring consumption back on track, she said.
Recent consumption data suggest pockets of weakness remain in China’s economy even as the recovery is gaining traction. While catering, tourism and other in-person businesses recorded big jumps in revenue over the Lunar New Year holiday, manufacturers and sales of cars continued to struggle.
Property Revival
Besides consumption, investors are looking for policy announcements to resurrect China’s beleaguered real-estate sector at the March meeting. Potential measures include further moves to ease developers’ cash crunch and spur home buyers’ demand amid an extended slump in the market.
Fidelity’s Mio prefers state-owned developers while awaiting a recovery in housing demand.
Valuations of Chinese stocks are still in bulls’ favor even after the reopening rally. The MSCI China Index is trading at 10.9 times forward price-to-earnings ratio, below the 10-year average of 11.2 times. That’s after the gauge has jumped 46% since end-October.
“Going forward, with things reopening, we expect even better earnings growth,” abrdn’s Kwik said.
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