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Chinese equity valuations attractive amid volatility

Investment managers tell us why China is still a good bet for long-term investors amid recent volatility

Citywire +rated Helen Zhu
Head of China equities
BlackRock

The volatility of the market is due to risk premium which is driven by the fear of where fundamentals could go – and not necessarily reflect current fundamentals.

China displayed a partial comeback in recent weeks, following a steady earnings outlook and signs that the yuan may be stabilising.

We believe the credit growth will continue to stabilise and the source of funding will be more open and sustainable through corporate bond issuance and bank lending.

What we are closely monitoring is the consumption figures, which is still resilient, but the market currently is pricing in a rather aggressive consumption deceleration. 

Higher US interest rates, coupled with a strengthening US dollar, are a challenging backdrop for China.

However, volatility creates price dislocations, and we are seeing investment opportunities in certain domestic cyclical areas, and remain confident in the underlying drivers of the asset class.

 

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Citywire +rated Helen Zhu
Head of China equities
BlackRock

The volatility of the market is due to risk premium which is driven by the fear of where fundamentals could go – and not necessarily reflect current fundamentals.

China displayed a partial comeback in recent weeks, following a steady earnings outlook and signs that the yuan may be stabilising.

We believe the credit growth will continue to stabilise and the source of funding will be more open and sustainable through corporate bond issuance and bank lending.

What we are closely monitoring is the consumption figures, which is still resilient, but the market currently is pricing in a rather aggressive consumption deceleration. 

Higher US interest rates, coupled with a strengthening US dollar, are a challenging backdrop for China.

However, volatility creates price dislocations, and we are seeing investment opportunities in certain domestic cyclical areas, and remain confident in the underlying drivers of the asset class.

 

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Citywire AA-rated Jian Shi Cortesi
Portfolio manager, Asian and China equities
GAM

Valuations of Chinese equities have become cheaper after the recent correction, although they are still above the levels seen at previous market bottoms.

Any further downside could offer good opportunities to buy consumer discretionary, insurance and technology stocks.

The best place to invest in China is within sectors benefiting disproportionately from China’s evolution towards a consumer driven economy. In particular, I favour technology, healthcare, financial services and the broad consumer space.

However, there are plenty of concerns that keep investors in a cautious mood. These include the US tariffs, softer Chinese economic data, tighter financial regulations in China, as well as the US dollar strength and renminbi or emerging markets currency weakness.

Meanwhile, uncertainties related to Turkey is also a concern.

In addition to the US-China trade tension, the key risk to monitor in China is whether business confidence will hold up and whether corporate earnings growth will decelerate in face of tighter domestic financial regulations and uncertain external demand.

 

 

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Frank Tsui
Fund manager
Value Partners

Valuations are getting more attractive with MSCI China 12-monhts forward price-to-earnings ratio, (P/E) trading at 10.9x as of Aug 17 vs. January high at 14.7x. 

Meanwhile, earnings per share growth in China remains one of the strongest in Asia ex Japan region at 15.7% 2018. 

We continue to favor the beneficiaries of consumption upgrade in China, financials as well as selective technology leaders despite we trimmed the sector since Q417. 

Despite the trade dispute between the US and China, the policy direction in China with the shift of policy stance from tightening to a more flexible approach announced in late July shall be closely monitored. 

 

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Citywire AA-rated Mandy Chan
Investment director, head of China and Hong Kong equities
HSBC Global Asset Management

Valuation of Chinese equities market has de-rated significantly year-to-date amid heightened macro headwinds.

While we see value emerged in selected sectors, we remain cautious in portfolio positioning. However, we continue to prefer domestic consumption driven sectors amid rising trade friction.

We also favor the banking sector as we expect loan growth to pick up later on the back of reserve requirement ratio cuts and liquidity injection by People's Bank of China (PBOC) via medium-term lending facility.

Elsewhere, we see investment opportunities in the insurance sector, as first year premium (FYP) sales growth already bottomed, and sector valuation remains cheap.

The speed up of fiscal spending and issuance of local government bond shall also underpin infrastructure investments.

 

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Related Fund Managers

Jian Shi Cortesi
Jian Shi Cortesi
7/69 in Equity - China (Performance over 3 years) Average Total Return: 25.73%
Helen Zhu
Helen Zhu
33/69 in Equity - China (Performance over 3 years) Average Total Return: 12.25%
Mandy Chan
Mandy Chan
16/94 in Equity - Greater China (Performance over 3 years) Average Total Return: 25.47%