China Market Outlook: A Shift from Beta to Alpha

In the past two weeks, China’s regulatory landscape has seen significant developments that have prompted shifts in market sentiment. These changes, initiated by key Chinese regulators such as the National Development and Reform Commission (NDRC), Ministry of Finance (MoF), Ministry of Housing and Urban-Rural Development (MoHURD), have reinforced the government’s commitment to stabilize and boost the economy. These measures are timely, given the challenges posed by a weak property sector, local government debt, and sluggish consumption growth.

Recent Regulatory Changes

On 24 September, the NDRC reiterated its pledge to ease monetary policy, though lacking specifics on the size of the stimulus. This initial announcement fell short of market expectations, leading to a temporary market correction. However, on 14 October, the Ministry of Finance stepped in with more concrete guidance, pledging fiscal support aimed at stabilizing the property market and restructuring local government debt. The ministry outlined measures such as a RMB 400 billion (USD 56.2 billion) additional local government bond issuance and the use of RMB 2.3 trillion (USD 323 billion) in unused funds from existing budgets by year-end. These steps signal a more aggressive fiscal approach from the central government, offering hope for a stabilizing effect on the economy and markets.

?

The overall sentiment and increased interest in Chinese assets suggest that global investors are regaining confidence in China’s long-term prospects.

Fund Flow and Investor Sentiment

Amid these policy shifts, we have seen notable changes in fund flows. On the domestic front, retail investor participation has increased, driven by the positive sentiment around recent stimulus announcements. The rise of younger retail investors has become more apparent as they enter the market directly, reminiscent of similar trends in Western markets post-pandemic.

Internationally, while emerging markets (EM) outside of China have experienced outflows, China has attracted inflows, particularly into equities and exchange-traded funds (ETFs). Although it is difficult to quantify foreign inflows due to the absence of real-time data, the overall sentiment and increased interest in Chinese assets suggest that global investors are regaining confidence in China’s long-term prospects.

?

China's Third-Quarter GDP and Market Outlook

China's Q3 GDP, recently announced at 4.9% year-on-year, slightly exceeded market expectations, despite the economic challenges posed by weak domestic demand and a sluggish property market. This better-than-expected result has boosted confidence that China's economic slowdown may not be as severe as feared. With the GDP data now in, the market's focus is shifting from broader policy announcements to individual company performance, particularly as corporate earnings for the third quarter start to be released. This shift from macro to micro factors is critical as investors assess the health and profitability of leading companies across key sectors.

Looking ahead, I believe that the market is transitioning from a “beta-driven rally” — where the broader market benefited from policy-driven momentum — to a “alpha-focused phase”, where stock selection becomes key.

Market Outlook: Shifting from Beta to Alpha

Looking ahead, I believe that the market is transitioning from a “beta-driven rally” — where the broader market benefited from policy-driven momentum — to a “alpha-focused phase”, where stock selection becomes key. As corporate earnings roll in and more clarity emerges around the effectiveness of recent policy measures, investors will increasingly focus on the fundamentals of individual companies.

Key sectors expected to benefit from China’s stimulus package include financials, property, consumer goods, and industrials. Each of these sectors stands to gain from improved liquidity, consumption stimulus, and infrastructure investment, although the exact magnitude of the benefits will depend on the effectiveness of policy implementation.

With valuations still relatively low compared to global markets, and improving economic indicators such as the recent GDP growth, there are signs that China’s equity market is poised for recovery.

China Equities: Long-Term Opportunities for Investors

For global investors, China’s market presents a compelling case for long-term growth. The shift from broad market momentum to a focus on individual stock performance offers opportunities to identify alpha. With valuations still relatively low compared to global markets, and improving economic indicators such as the recent GDP growth, there are signs that China’s equity market is poised for recovery. Investors would do well to stay informed, focusing on sectors and companies with strong fundamentals and growth potential, as China navigates this critical phase of economic stabilization and policy implementation.

************************

About the Author: Victoria Mio is the Head of Greater China Equities and Portfolio Manager of Janus Henderson Investors. She is a senior investment and research executive with over 25 years of experience in portfolio management, equity research, and team leadership. She has strong global perspective through working in top European and American asset managers for two decades. Victoria is a well established investment spokesperson on China and Asia, sustainable investment, and market trends.

Views are on her own on LinkedIn.