Despite strong headwinds, the CSI 300 Index is up 28% year-to-date, but the firm remains lukewarm on China equities, both A- and H-shares.
“The Chinese stock market shows good value versus the US, but we’re not significantly overweight,” said Kevin Anderson, head of investments in Asia-Pacific at State Street Global Advisors, at a media briefing in Hong Kong briefing yesterday.
“We are overweight on consumption, insurance, and healthcare sectors spread across both A and H-shares. At the same time, we are neutral on the China property sector.”
Anderson is not distinguishing between A and H shares. “Obviously, there are differences in the premium between A-share and H-share companies in both markets,” he said. “However, we are looking at the fundamentals of the company within the sector.”
He noted several headwinds. China’s GDP growth is in a long-term downward trend and the US-China trade dispute has worsened the situation as indicated by the fall in China’s import and production indexes, he said.
“In the short term, the trade war is certainly hurting. In terms of the purchasing managers’ indexes, all of these are showing some impact from the current trade tensions between US and China.”
In 2019, the firm estimates that China’s year-on-year GDP growth will be 6.1% and in 2020, the figure is forecast to be 5.8%.
Slowing GDP growth is “inevitable” during the transition to a more consumption-based economy, he said.
“For a number of years, China has to maintain a careful pathway in order to navigate that transition.”
Knowable risks
Anderson singled out the trade dispute as a major concern. “The risk is that there will be no phase one deal and then how long the status quo will remain.”
He also cited policy risk. “As the overall market environment continues to get more turbulent, those policy decisions are more and more important. And we’ve seen policy makers in Beijing, and around China be more restrained in the application of policy.
China’s credit-to-GDP figure has been steadily rising over the last few years and is now around 208%, according to SSGA data.
“There has been some stimulus and there is some easing, but [high] credit-to-GDP for example, is a reminder that the allocation of stimulus across-the-board is not something that can be healthy.
“And if that were to be applied and too many fiscal, or monetary easing policies were to be implied across sectors, then that really would not be beneficial,” he said.
He remained upbeat on the opening of China’s financial markets. “The access that has enabled investors over the last several years, with the important developments of the Shanghai and Shenzhen stock connect, really creates a much more level playing field for access for overseas investors compared to the QFII an RQFII [investment quota] schemes.”
A-share bulls
SSGA’s moderate outlook is in contrast to other asset managers and wealth managers who are optimistic on China A-shares, such as Allianz Global Investors, DWS, Value Partners and Hang Seng Bank’s wealth management division.
“In May of this year, the trade war heated up again and tariffs were imposed, but A-shares were stable,” said Anthony Wong, Allianz GI portfolio manager, at a recent Hong Kong media briefing. “This reflects that investors have absorbed the negative effects of the dispute.”
“If a trade agreement is reached, it is certainly better, but if it is delayed, the negative impact on the [A-share] market will be limited,” Wong said.
