[China Trip Report] The Strategic Case for Investing in China Amid Global Market Volatility and Policy Shifts

My Key Takeaways from Visiting Shanghai, Shenzhen, Hong Kong, and Macau in August 2024

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"Throughout my meetings, a recurring theme was the anticipation of further government policy support... alongside fiscal measures to stimulate demand, are likely to provide much-needed relief to both the corporate sector and consumers, boosting investor confidence in the medium term."

Over the past two weeks, I had the opportunity to visit four major cities in China—Shanghai, Shenzhen, Hong Kong, and Macau. It was a productive trip with numerous fruitful meetings, where I met with over 30 companies across various sectors. This on-the-ground research allowed me to assess the latest developments in different industries and to gauge the broader economic performance of China. Below are some of my key takeaways from the trip.

1. Macroeconomic Challenges vs. Corporate Resilience

Despite the broader macroeconomic deceleration, particularly in the housing market, leading companies across various sectors are showing resilience. These firms are navigating the economic slowdown by employing strategies such as innovation and cost optimization. However, China’s property market continues to weigh heavily on the economy, with both prices and transaction volumes in decline, dragging down overall consumption levels.

2. Policy Expectations and Market Outlook

Throughout my meetings, a recurring theme was the anticipation of further government policy support. As growth continues to face headwinds, China’s policymakers are expected to introduce additional easing measures, including a reduction in refinancing rates for CNY38 trillion (USD5.32 trillion) of existing mortgages and potential cuts to the required reserve ratio (RRR). These policies, alongside fiscal measures to stimulate demand, are likely to provide much-needed relief to both the corporate sector and consumers, boosting investor confidence in the medium term.

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3. The “Japanification” Debate: Parallels and Key Differences

There has been ongoing debate over whether China risks following Japan’s path into long-term deflation and economic stagnation, particularly given the ongoing property sector struggles and weak consumer confidence. According to a recent South China Morning Post’s op-ed (titled “China’s economy isn’t becoming Japanified, at least not yet”), China does share some worrying similarities with Japan’s experience in the 1990s, such as deflationary pressures and rising debt-to-GDP ratios. However, there are key differences: China has studied Japan’s experience carefully and is taking steps to avoid a similar fate. Moreover, China’s much larger domestic market, lower urbanization rate, and catch-up growth potential differentiate its economic outlook from that of Japan in the 1990s.?

China remains a strategic choice for those looking for diversification and are willing to navigate its complexities – especially in a time with uncertainties of U.S. Fed rate changes, global market volatility, and geopolitical tensions.

4. Global Market Volatility and China’s Low Correlation

Amidst global market uncertainty, including the anticipated U.S. Federal Reserve rate cut and Japan’s recent stock market volatility, China’s equity market continues to show a relatively low correlation with other major economies. Since 2018, trade tensions and reduced U.S. investment in Chinese assets have contributed to this decoupling, offering investors a strong diversification tool. In times of heightened global uncertainty, China’s lower correlation with other markets presents an opportunity for stability and portfolio diversification.

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5. Valuations and Sectoral Opportunities

Valuations in China remain attractive, with the MSCI China Index trading at a price-to-earnings (PE) ratio of 8.6x, down from 10.6x just a few months ago. This discount relative to global markets makes Chinese equities an appealing option for value-seeking investors. The technology sector, driven by strong earnings visibility and potential stock buybacks, remains robust. Similarly, the healthcare sector is benefiting from changing demographics, and high dividend stocks in sectors like utilities, financials, and telecoms are also outperforming.

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6. Concluding Thoughts

In summary, despite the macroeconomic challenges, with further policy support expected and attractive valuations in key sectors, China remains a strategic choice for those looking for diversification and are willing to navigate its complexities – especially in a time with uncertainties of U.S. Fed rate changes, global market volatility, and geopolitical tensions.

This trip reinforced my belief that, the resilience and potential of China’s market make it a key component for long-term, diversified global investment strategies.

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.