Despite the recent rally in Chinese equities, it is too early to see whether growth in China can be stimulated given the structural challenges that still persist in the world’s second largest economy.
Ecaterina Bigos, AXA IM’s Asia CIO said at a recent media event in Hong Kong: “If you look back a month and half ago, the biggest attraction for Chinese equities were depressed valuations.”
“Those valuations are not as attractive given the spectrum of the macro challenges that still persist, particularly deflation.”
Chinese equity markets rallied sharply in late September after a surprise monetary stimulus announcement which included rate cuts and liquidity support for banks.
However what is ultimately going to change the trajectory of the Chinese economy is a substantial fiscal package, according to Bigos.
“More importantly, we have to see how it will be implemented, which part of the economy it will be channelled to.”
AXA IM’s chief investment officer (CIO) Chris Iggo stressed that the most important thing is that any Chinese stimulus does is address domestic demand.
But he warned that investors also need to closely monitor how the geopolitical environment evolves for China, because of the impact of potential tariffs.
Stimulus needs to be directed towards consumption
Any Chinese stimulus needs to be directed towards domestic services and consumption before AXA IM starts considering a more bullish view on Chinese equities, Bigos said.
“For the last decade, China has leaned a lot more into investment as a way to recover and drive growth: we’ve seen investment deploying infrastructure, into property, and that has led to misallocation of resources,” she said.
“We’ve had leverage that has increased in public sector. We’ve seen leverage that has increased in local government entities. That needs to be rebalanced.”
“We need to see China’s ability to redirect its economy away from leverage, away from investment, into more into services and a lot more into consumption.”
So although the recent monetary stimulus announcements from China may have “put a floor” on its economic weakness, investors still need to see an earnings recovery, Bigos added.
“For earnings to recover, we need to see China to come out of the deflation, and that’s subject to the consumer companies recovering.”
“The consumer confidence recovery is anchored around employment, which has been quite weak. It’s anchored around wealth creation, which is linked to the property market.”
In her view, due to the current propensity of local consumers to save more than spend, it is important that the capacity of China to consume “is released”.