The Chinese market has recently garnered significant attention from investors due to a notable decline in its stock market valuation. The Hang Seng Index, a crucial benchmark for the Hong Kong financial world, has seen nearly a 50% decrease since its peak in 2021, now trading at a historic discount compared to US stocks. The valuation gap, stemming from the impact of the COVID lockdown, stringent government measures in China, and a slower-than-expected economic recovery has sparked interest among value investors worldwide, leading to a closer examination of China’s economic landscape. In asset management, exposure to international markets is crucial for diversification, and the current situation in China holds opportunities that cannot be overlooked.
The Chinese government’s approach to monetary policy stands as a cornerstone of its efforts to stabilize and stimulate the nation’s stock market. While most of the world is raising interest rates in order to slow down their economies to combat inflation, China is doing the opposite. Currently, The People’s Bank of China, China’s central bank, is lowering interest rates in order to spur economic growth. This is bullish for Chinese equities because lower interest rates help businesses grow faster as the cost of borrowing money becomes cheaper.
Furthermore, to stabilize the market, Chinese state-owned companies plan to inject 2 trillion yuan (approximately $278 billion) via offshore accounts, channeling these funds to purchase onshore stocks through the Hong Kong markets. There is also ongoing pressure from investors for China to increase stimulus further.
This discrepancy between the impressive financial performance of major Chinese companies like Alibaba, JD.com, and Tencent, and their current stock valuations present a unique investment opportunity. Despite the remarkable growth in revenues and earnings over the years, these companies find themselves at historic discounts in the stock market.
Alibaba, a giant in the e-commerce industry, has witnessed an 800% increase in revenues and a remarkable 500% growth in earnings since its initial public offering (IPO) in 2014. However, the market seems to undervalue these achievements, as the stock is currently trading down by approximately -23% from its IPO price, at $71.85 per share. The decline in shares can be attributed to excessively pessimistic perspectives on China’s economic recovery. Nevertheless, new and more assertive measures are being implemented to stimulate investments in China’s stock market.
Hedge fund managers also understand that valuations at these levels can not be ignored
Hedge funds are currently shifting from a negative sentiment to a more positive one regarding the Chinese stock market. In fact, the purchase of Chinese equities by American hedge funds from January 23-25 marked the biggest three-day purchasing spree of Chinese equities by hedge funds in more than five years. This is the result of the Chinese government pledging to take actions in order to promote growth in the Chinese equity markets. Hedge fund managers also understand that valuations at these levels can not be ignored. For example, Bridgewater Associates told investors it was “moderately bullish” on Chinese stocks as the prolonged rout made valuations attractive.
Investments in China rely on China’s economic strategy. It is currently expected that China’s economy will grow at about 4.6% in 2024, more than twice the pace of the US. Along with China’s monetary easing, increased government spending on technological innovation is a key driver for China’s economic growth as well. The resurgence of tech giant Huawei and the breakthrough success of its M60 smartphone, powered by an in-house designed 7-nanometre chip, exemplifies China’s ambition to diminish its reliance on foreign technology. Furthermore, China’s dominance in electric vehicle (EV) production and its pioneering efforts in green energy technologies signal its intention to secure a competitive edge in crucial, future-oriented industries. Interestingly, China added more solar panels in 2023 than the US did in its entire history. These achievements not only showcase China’s innovative prowess, but also mark its strategic pivot towards a consumption-driven economy, opening new growth paths in the services and advanced manufacturing sectors.
“Price is what you pay; value is what you get”
Benjamin Graham
However, the investment landscape in China comes with significant risks. The reliability of official data is questioned, and Moody’s downgrade of China’s economic outlook reflects concerns over the sustainability of stimulus measures and the fragility of the property market. Investors must strike a delicate balance between the promising long-term opportunities and the inherent risks embedded in the Chinese investment landscape. Nevertheless, signs of a possible economic revival, such as an increase in manufacturing orders, offer a glimmer of hope.
The broader implications of China’s economic maneuvers extend well beyond its borders. Efforts to mend fences with the U.S. and other global players could alleviate geopolitical tensions and foster a more supportive framework for international cooperation and investment. Such developments would likely bolster the Chinese stock market, benefiting from enhanced global relations and continued technological advancements.
The current undervaluation of Chinese stocks, as proven by major companies trading at historic discounts, presents an enticing opportunity for long-term investors. The recent positive sentiment shift among hedge funds, coupled with the Chinese government’s commitment to economic stimulus and strategic investments, positions these stocks as attractive options for asset manager’s emerging markets positions.
