Value managers frequently engage in market exploration during periods of market downturn, and presently, China emerges as a compelling and logical choice for such endeavors.
It has been acknowledged by experienced individuals in the field of bargain hunting that the economic growth prospects of China appear to be surrounded by uncertainty, with policymakers potentially encountering further challenges in their decision-making processes. Beijing will persist in stabilizing the economy, potentially generating strategic prospects within specific market segments.
Investor Confidence Is at an All-Time Low
Investor sentiment towards China has been negatively impacted by several factors, including the country’s economic recovery following a prolonged period of stringent COVID restrictions, unpredictable policy measures, and a crackdown on its property market. Additionally, the performance of prominent entities such as Alibaba Group Holding has further eroded confidence among households, businesses, and investors. As a result, there has been a notable departure of investors from China.
Amidst the escalating tensions between the United States and China, many money managers have opted to curtail their investments in China. Consequently, they have introduced emerging markets ex-China funds to cater to apprehensive clients.
However, for experienced individuals well-versed in managing volatile policy environments within emerging markets, the attractively low valuations observed in specific segments of the Chinese stock market serve as an enticing factor. Arjun Divecha, the esteemed founder of GMO Emerging Markets Equity, maintains a cautious stance towards China, albeit with a discernible reduction in concern regarding the nation’s gradual recovery from the impact of the COVID-19 pandemic.
The Government Is Proceeding Cautiously but Correctly
The normalization of demand is anticipated to occur, with indications suggesting its incipient manifestation, particularly evident in automobile sales, as stated by the individual. The government’s cautious approach in stimulating the economy can be attributed to its prudent consideration of debt concerns. However, it is anticipated that their efforts will ultimately yield success.
The analysts at BCA Research have observed economic stabilization, as evidenced by the improvement in China’s credit growth in August and the alleviation of deflationary pressures previously observed during the summer. Notably, consumer prices have risen by 0.1% compared to last year, a notable improvement from the 0.3% decline experienced in July.
The BCA analysts seek proactive policy measures that can generate substantial economic improvement. This would prompt a reconsideration of their underweight recommendation for Chinese assets, potentially reducing their bearish stance.
Investors Do See Favorable Market Prospects
According to Louis Lau, the Director of Investments at Brandes Investment Partners, various potential avenues exist to enhance investor sentiment. Lau has already initiated the search for opportunities within internet stocks, life insurers, sportswear manufacturers, and the solar supply chain. This pursuit aims to identify potential areas for improvement and growth.
Henry Mallari-D’Auria, the esteemed Chief Investment Officer of Global and Emerging Markets Equities at Ariel, directs his attention towards consumer-oriented enterprises that he anticipates will experience accelerated growth in the forthcoming years. This projection is attributed, in part, to the endeavors undertaken by Beijing to restore confidence among households.
According to Mallari-D’Auria, there are indications of property price stabilization resulting from the gradual measures implemented by policymakers in recent weeks, which are aimed at establishing a foundation for the restoration of consumer sentiment. Several consecutive quarters of relatively stable property prices, consistent income growth, and robust auto sales contribute to the argument that consumer confidence is showing signs of improvement.
The enhancement above is expected to benefit companies such as Alibaba, as Mallari-D’Auria believes it possesses the potential to achieve success through various means. The individual asserts the presence of a cyclical rebound while concurrently highlighting the company’s ongoing efforts toward internal restructuring.
The recent announcement of former Alibaba Chief Executive Daniel Zhang’s resignation, a mere two months after assuming the responsibility of directing the company’s AliCloud division, has resulted in a temporary decline in the stock value, with a decrease of over 4% following this development.
According to the official statement released by the company, it has been confirmed that Mr. Zhang will be departing from his current position to oversee a newly established technology fund. It is anticipated that AliGroup will make an initial investment of $1 billion into this fund.
Based on current observations, Mallari-D’Auria perceives that the above development does not influence the profit growth prospects of Alibaba’s fundamental operations. Furthermore, he anticipates the predetermined schedule for the unit’s spinoff remains the same.
A potential spinoff has the potential to impact the overall valuation of the company positively. Additionally, a near-term growth catalyst could arise from increased consumer confidence and subsequent spending patterns. The recent implementation of cost-cutting measures within the organization is expected to yield positive outcomes.
Mallari-D’Auria anticipates that valuations may not fully revert to their pre-crackdown levels. Nevertheless, he asserts that investors have the potential to achieve favorable results, even if the stock experiences a rebound from its current modest valuation of nine times earnings to a range of 11 to 12 times payments, as market confidence gradually strengthens.
Suppose there is an improvement in consumer sentiment due to increased stimulus measures implemented by Beijing. In that case, it is suggested by Mallari-D’Auria that automakers such as Great Wall Motor (2333 – 0.31% on the stock market) may experience positive outcomes. Improved auto sales would have a positive impact on the company’s performance. Introducing a new sport-utility vehicle has positioned them to capture a larger market share, thereby increasing profitability per unit. This strategic move is expected to enhance overall profit margins.
Beijing’s Priority Industries Will Remain Profitable
China’s growth rate ranges between 3% to 5%, which is notably slower. However, it is anticipated that China will experience more robust growth in specific sectors prioritized by Beijing, namely technology and businesses associated with the green transition. This projection considers the escalating geopolitical tensions between China and the United States.
The imposition of U.S. sanctions, which have resulted in the restriction of China’s access to vital technologies, has prompted the Chinese government to intensify its investments in electric vehicles, semiconductor chips, and computers to reduce its dependence on the global market.
According to the individual, the decline in growth and its potential stagnation should not be perceived as an irreversible catastrophe or a fundamental alteration. When considering long-term prospects, it is essential to acknowledge the persistent challenges posed by a diminishing population and the burden of national debt.
The potential for increased financial gains is observed when transitioning from a state of profound adversity to a condition of moderate suboptimal circumstances, as opposed to progressing from a state of satisfactory conditions to a state of exceptional prosperity.
Thus far, the message above has yet to garner significant traction within the market, as evidenced by the iShares MSCI China exchange-traded fund (MCHI) experiencing a decline of 5% year-to-date. However, this situation presents an opportunity for astute consumers seeking to take advantage of the current economic conditions in the world’s second-largest economy.