As China’s stock market struggles to break out of its three-year long bear market, investors are on the lookout for much-needed policy support.
There is a major disconnect between how foreign investors perceive the Chinese economy and how Chinese policymakers view it, according to a report from UBS global wealth management (UBS GWM) chief investment office.
Chinese policy makers remain resolute on growing the economy with a 5% target until its “new economy” growth drivers take hold, without massive stimulus.
However, foreign investors see “an enormous market fraught with cyclical and structural risks, requiring heroic stimulus efforts to overcome”, the report said.
“Beijing appears to be sticking to a moderately pro-growth stance that will likely deliver just enough policy support to prevent the recovery from slipping too far out of the comfort zone in 2024,” it said.
But there is a growing case for an “upside policy surprise” if the country’s growth challenges become entrenched. Meanwhile the authors flagged that the latest data coming out of the country is “adding fuel” to stimulus expectations.
Despite beating its official growth target last year, the economy is struggling with its longest deflationary slide since the Asian Financial Crisis in the late 1990s, home prices recently fell by the most since 2015, and manufacturing PMIs are back in contraction.
Debt driven growth is unsustainable
The country’s favoured growth drivers of the future – consumption, green energy and high-tech industries – “are also simply too small right now to offset the slowing sectors of today (property, investment)”, the UBS GWM report said.
China has been pushing to transform its economy towards newer industries, such as technology and services rather than relying on heavy industries such as manufacturing and property that fuelled its past economic growth.
“The time required to transition to these new drivers means that they too need policy support to smooth growing pains,” the authors said.
“These all raise the policy bar to steady the economy, in our view, and call for unconventional demand-targeted policies to revive confidence.”
These kinds of policies are not unprecedented, as the government has resorted to large-scale easing during previous crises.
These views are similar to that of Fidelity’s Asia economist Peiqian Liu (pictured) who said that policy support “is critical” for a stable growth recovery in China.
Liu told a recent media briefing that to support China’s move away from a debt-driven growth model, policy support is needed because “the cyclical rebound this time is intertwined with structural headwinds that China is facing”.
“The reason behind why China is not rolling up bazooka stimulus at this point of time, in my view, are because of some constraints that China is currently facing,” she said.
She pointed to China’s debt buildup which she noted has been aggressive over the past decade: “The headline total debt is almost amounting to 300% of GDP, which leads China to rethink its growth model as its debt driven model does not look sustainable going forward”.
But she added that if organic growth starts to emerge in the form of corporate profit growth and wage growth, positive investor sentiment might start to return to the region as investors become more “accustomed” to China’s new growth model.
“There is still a downside risk to market forecasts”
However, the lack of stimulus is providing ample opportunity for some bottom-up active managers to get invested in the region.
Wenchang Ma (pictured), manager of the Ninety One All China Equity fund told a recent media briefing that although overall Chinese corporate earnings look vulnerable to disappointment in the near term, some individual names are still emerging as winners.
“The Chinese equity market consensus is forecasting 15% growth,” she said. “So in the current environment, looking at the preliminary numbers and the comments on the most recent operational momentum by some of the corporates, it seems that there is still a downside risk to market forecasts on corporate earnings growth in 2024.”
Although many Chinese stocks are trading below 10-times forward earnings multiples and two standard deviations below their long-term valuation averages, investors still need to be “very careful” with the earnings forecasts of some of the cheaper companies in the market, she warned.
“Street analysts may be slow to consider weakening demand or increasing competition for individual companies,” she said.
Amid this bleak backdrop, she noted that there are some individual stocks in the consumer sector generating 15% to 20% growth, and industrial stocks delivering 40% to 50% growth.
“Some of the technology companies that are related to AI demand growth in the downstream that are generating a forecasted bottom-line growth of close to 100%,” she said. “So it’s these kind of individual names that we’re trying to discover.”
