After years of bad news flow coming out of China, from the crackdown on its technology sector to its ailing property sector, global investors are now ignoring improving corporate fundamentals in Chinese equities.
This is according to Jian Shi Cortesi, Investment director of GAM’s China and Asia equity team, who thinks that macro-driven discussions have now taken precedence over bottom-up analysis of Chinese corporate earnings.
“Anecdotally, in the West I think a lot of people have stopped looking at corporate earnings for Chinese stocks,” she told a recent media briefing.
“Five years ago, investors would care about earnings, but today, so much Chinese stock trading by international investors is driven by macro.”
Indeed, most of the concerns foreign investors have with regards to China today are all macro-orientated or top-down issues.
These include potential problems posed by the property market’s spillover to domestic consumption, the trend of diversifying supply chains out of China, its ageing society, or its high debt to GDP ratio.
Cortesi suggested that after a few more quarters of Chinese companies beating their earnings estimates, foreign investors will likely eventually return to the equity market regardless of any bad macro news flow.
However, she pointed out that challenges still remain for many global pension funds when it comes to Chinese equity investing.
“Imagine if I’m a pension fund in the West, I have so many things to cover, and China is a small part of the equity market,” she said.
“If there’s a lot of talk about the property market, then I would be concerned about the property market, but would I spend five hours to try to figure out the Chinese property market? Probably not.”
“The key is that people are very much driven by the news flow, and most investors do not have the time or the effort to really look deep into it.”
She argued that this dependency on news snippets and headlines has contributed to the boom-and-bust cycles typically observed in Chinese equities.
She said: “During these boom cycles, everybody says ‘China is an opportunity’. Do they really look into it and see the details? Probably not.”
“Then during the down cycle it’s the same. People make a quick conclusion that China is risky, or China is too difficult to invest in and they just stay away.”
Amid this overly pessimistic sentiment among foreign investors, Cortesi said that Chinese sovereign funds have been buying the equity market given the low valuations.
“Share buybacks normally are not that common in China, but this year more and more companies have started to buy their own shares because of their low valuations,” she said.
GAM Investment analyst Wendy Chen pointed to the rapid growth and dominance of the domestic electric vehicle (EV) sector in China as one example of the relative undervaluation of Chinese stocks.
“China’s EV industry has emerged as a role model for the country’s transformative journey,” she said.
“Currently, China produces 60% of the global EVs sold, highlighting its continued dominance in the global EV market. The sector is experiencing rapid growth, with significant advancements.”
She compared the stock price performance of Chinese EV manufacturer Li Auto, which has seen substantial gains in the past year, to that of its American counterpart, Tesla
She noted how despite growing its revenues by 170% over the past year, it still trades at a lower forward price-to-earnings multiple than its US competitor Tesla which grew at a slower pace.
“It is a good example to showcase how ridiculously cheap Chinese equities are despite being fundamentally very solid or their outperforming fundamental growth,” she said.
