“In China’s economy, we see some of the lowest growth ever,” said Sean Taylor, chief investment officer and Apac head of emerging markets, in a recent media briefing.
“Infrastructure and property are not helping, so the pick-up has to come from trade, making a trade deal necessary.
“But a deal is not imminent, however. While attention might go away from the deal in the short term, there may be progress in Q1 2020.”
Taylor noted that in the short-term, A-shares are much more driven by policy stimulus measures and many of Asia’s investors are more likely to understand that than foreigners investors, who generally buy when they see earnings come through.
A-shares have been soaring this year. According to FE data, the CSI 300 Index is up 26.7% year-to-date compared to -27.6% for the full year 2018.
“A-shares have had an incredibly good run this year and they will continue to outperform,” he predicted.
However, DWS is neutral on China equities. In A-shares, Taylor prefers healthcare, education, e-commerce, consumer discretionary stocks and insurance industries. He also likes the tourism sector because he sees it being driven by the younger generation.
Value Partners also expressed bullish views on A-shares, which Luo Jing, senior fund manager, said are cheaper on average than the MSCI China index (mostly comprised of foreign-listed China shares) in terms of both price-to-earning ratio and price-to-book ratio.
The A-share PE ratio is 10 and price-to-book is 1.1, while the multiples for the MSCI China index is 12 times and 1.5 times, respectively, Luo said.
H-shares are a different story and DWS maintains an underweight on Hong Kong equities. Since the social unrest began earlier in the year, capital has flowed out of Hong Kong, Taylor said. But some of the selling has been offset by inflows from mainland China through the stock connect.
DWS keeps its overweight on US equities, which have been outperforming “but that will change at some point. This could happen perhaps next year, but not while there is trade uncertainty and strong dollar.
“The strategic outlook is one of US out-performance despite moderating growth,” Taylor said. “A Q1 2020 trade agreement [with China] could boost markets.”
DWS’ tactical overweights are in India, Thailand, Brazil and Russia.
Taylor also commented on the shift between growth and value stocks: “Next year we will look for overweight in value.”
