The long-term outlook for Chinese equities remains promising despite the current challenges in the domestic economy, especially for value investors in line with policy priorities.
According to AB, valuations in the offshore and onshore markets are attractive versus the last 10 years. “Chinese equities also look cheap relative to the MSCI World Index of developed-market stocks,” said John Lin, chief investment officer for China equities at the US fund house.
Yet within this new era of reduced growth, he expects value investing to trump growth-oriented strategies that traditionally have been more popular among investors in China.
This is in line with the next stage of China’s evolution, which generally calls for a more value-oriented approach to the equity market.
“With a strategy that is attuned to the unfolding changes, we believe long-term investors can gain confidence to include Chinese equities as a standalone component within a diversified global equity allocation,” added Lin.
Aligning with policy objectives
The high potential for an earnings rebound might not happen straight away. In Lin’s view, it is more likely in 2024. “Eventually, though, we expect Chinese earnings to outpace those in stocks from major developed and emerging markets.”
At the same time, any future US dollar weakness could attract additional inflows into the country, potentially benefiting equities and the renminbi.
“Identifying strong companies with robust cash flows at reasonable valuations will be critically important,” Lin explained. “[This] will provide investors access to stocks in China’s large and liquid equities market with the most attractive alpha potential.”
As opportunities emerge, the most compelling are likely to be found in companies aligned with the government’s commercial and policy objectives, said Lin. These include technology security and domestic decarbonisation.
“We also see opportunities in industrial cyclical companies such as bus makers and forklift manufacturers that have developed compelling products with a strong international footprint,” he added. “These companies straddle domestic and export markets, offering multiple avenues for success.”
Similar opportunities exist in other sectors, Lin noted, including home-use medical devices, home appliances and e-commerce.
“All of these options offer attractive ways to access China’s dynamic equity market, in our view.”
