The MSCI China Index has fallen 17% year-to-date after finishing the full year 2017 up 54%. Sentiment has tanked due to issues such as the trade conflict with the US and GDP growth downward revisions.
In fact, the Asian Development Bank has trimmed China’s GDP growth to 6.3% in 2019, below its initial 6.6% estimate for 2018.
But some managers believe Chinese stocks have been oversold, creating a buying opportunity.
“The substantial correction in Chinese equity valuations this year reflects a disconnect between sentiment and fundamentals. What investors should monitor is whether companies’ business models and growth prospects are impaired,” according to Nicholas Yeo, head of China equities at Aberdeen Standard Investments (ASI).
Michiel van Voorst, chief investment officer for Asian equities at UBP, is broadly in agreement.
“We continue to like China where sentiment is extremely low while fundamentals are not reflecting the same level. In this context we expect a relief rally.
“Investment opportunities, low valuations, and sound fundamentals have contributed to our overweight position in Chinese equities,” Van Voorst said.
Both firms find compelling stories in A-shares. The optimism is rooted in China’s efforts to ensure higher-quality growth and reforms to address structural fragility, coupled with the latest stimulus to boost consumption.
With around 380 million millennials in China, the argument for consumption to drive portfolios is compelling, provided economic growth stabilises.
“We favour companies in line to benefit from consumption growth, especially premium brands with rising average selling prices. The desire for a higher quality lifestyle of an expanding middle class will continue to drive demand for healthcare, travel, insurance and other lifestyle-led services,” added Yeo.
The firm looks for what it considers best-in-class companies with sustainable earnings growth and still trading at a reasonable valuation.
Andrew Milligan, head of global strategy at ASI, said there are two key questions for 2019.
One is how China’s relationship with the US will evolve and the other is the extent of policy stimulus to support growth.
“If the US takes a much harsher approach to China, it will disrupt not only trade but also technology transfer, China’s influence with its Asian neighbours through One Belt One Road, and even the balance of power in the Pacific,” Milligan said.
Can China consumers drive portfolios in 2019?
Some China consumer funds vs the MSCI China Index and the sector, year-to-date