Chinese EQUITIES
The Chinese equity market has been a bit of a graveyard for investors for a long time. There have been several attempts in the last decade to engage animal spirits, but each burst of enthusiasm eventually fizzled out and the net result is that Chinese equities have done nothing for 15 years.
The Chinese equity market has been a bit of a graveyard for investors for a long time. There have been several attempts in the last decade to engage animal spirits, but each burst of enthusiasm eventually fizzled out and the net result is that Chinese equities have done nothing for 15 years.
MSCI China
Source: Bloomberg
This is not to say the size of the Chinese stock market has not increased. The chart below shows the market capitalisation of the same index over the same period which has increased tenfold. This is because Chinese companies have issued a lot of equity over this period. This is a stark contrast to the S&P 500 were US companies have reduced their share count with buybacks.
MSCI China – Market Capitalisation
Source: Bloomberg
In early 2024, the Chinese authorities began several measures to support their domestic equity markets. Central Huijin, the state’s influential investor arm, stepped into the equity market as part of a broader market-support effort. It significantly ramped up its holdings in exchange-traded funds (ETFs), with assets exceeding RMB1 trillion (approximately $140 billion), making it a cornerstone of the government’s stabilisation efforts. This marked a sevenfold increase in its ETF holdings from the prior year. In addition, there were regulatory changes and mandates for institutional investment in domestic shares. The chart below shows that Chinese equities have handily beaten the S&P 500 since these measures were announced.
MSCI China V S&P 500 (USD)
Source: Bloomberg
There are undoubtedly some negative fundamentals such as the massive overcapacity, depressed housing market, and substantial demographic headwinds. However, China has made huge strides in some of the most cutting-edge technologies such as electric vehicles and artificial intelligence. It has the lowest cost of energy and capital in the world. By contrast to the US markets which trade at all-time high valuations, Chinese equities trade on much more modest valuations with room to expand. In the wake, of Russia’s invasion of Ukraine, Chinese assets were viewed as un-investable. However, as time passes and “realpolitik” reasserts itself, the tide has changed but still has a long way to go in terms of investor positioning.
Outlook
The history of the Chinese stock market in the last decade has broadly been one of woe, punctuated by some bouts of frenzied speculation. This time around we feel that the authorities are trying to engineer rising asset prices but in a more measured way. As such, a period of consolidation is likely as Chinese regulators propose measures to cool speculation and curb the rapid growth in margin financing. Looking further out, the case for owning Chinse equities remains strong, supported by a favourable policy backdrop. We feel that the authorities would much rather see a slow and steady bull market driven by long-term value investment, not retail speculation. In the past, domestic savers have shunned their home markets as the authorities have prioritised other policy areas. As the rest of the world becomes a more hostile place for surplus Chinese capital, domestic equities should benefit.
