Our Opinion: 2023
Chinese stocks’ going cheap
China’s economy is back in business and the world’s second-largest economy is enjoying a reopening boom. GDP expanded by an annual 4.5% in the first quarter. The rebound has been led by consumers, with retail sales surging by 10.6% year on year in March. Even the long-suffering housing market is showing signs of revival.
While consumption roars, manufacturing is struggling. China’s manufacturing Purchasing Managers’ Index (PMI) fell to 49.2 in April from 51.9 in March, even as the services PMI registered a robust 56.4. Western shoppers are not buying as many Chinese-made goods as they did during the pandemic. Still, officials in Beijing won’t be too worried about the lopsided recovery. They have spent years trying, largely fruitlessly, to rebalance” the economy towards services and consumption. It now seems “rebalancing has finally happened.
The consumer-led nature of China’s recovery means it “will have less impact
on the rest of the world than in previous upswings. Previous rebounds in China have been decisive for global growth. In 2009 and 2016, for example, significant stimulus focusing on infrastructure led to a rebound in world trade. Yet this time infrastructure spending is likely to slow, which will “dampen” any rebound in commodities.
Analysts predict a 22% jump in operating income for MSCI China companies this year, the fastest growth since 2011. Yet you wouldn’t be able to tell by looking at the stock market. While shares did enjoy a bounce last autumn as zero-Covid was scrapped, the rally soon lost steam. The local CSI 300 benchmark gained just 3.5% in 2023.
The MSCI China index is on just 7.6 times expected operating profit, 9% cheaper than the average over the past 20 years and 34% below the figure for the MSCI All- Country World index. Such discounts have previously only appeared in times of acute stress, such as the 2015 stock market crash. This time the discount reflects geopolitical tensions and a less friendly business climate. Many global fund managers are steering clear after seeing wartime sanctions erase the value of Russian investments. The issue is not so much potential returns but whether investors can get their capital back at all in a crisis. Foreign money, particularly from the US, is reluctant to invest.
Allocations to US-domiciled China funds plumbed record depths last October and have been falling on an annual basis since 2019. While some investors see short-term returns in prospect, the long-term outlook is far hazier. Decades-long foreign bullishness on China’s capital markets is breaking down.
15th May 2023
