China’s equities may bounce back from multi-year lows

Anthony Wu, CFA, Portfolio Manager, SLGI Asset Management Inc.

Chinese equities have been unloved assets in financial markets in the recent past. Some surveys even suggest that a significant number of investors believe China is “uninvestable.” China’s GDP is the second largest in the world and we certainly don’t believe in this narrative. Moreover, we see a possibility of significant value in Chinese markets ahead.?

While we don’t know if China can quickly solve all its structural economic problems, we do think Chinese assets are so inexpensive now that they can produce strong returns in the next six to 12 months.

Our current contrarian tactical position is a bet that the extreme negative sentiment towards Chinese equities will moderate with more government policy support and lower market volatility over the next few quarters.

Why has China underperformed since 2021?

As measured by the benchmark CSI 300 Index, China’s shares have fallen more than 35% from their peak in early 2021 to April 2023. During the same time, equities across most parts of the world rose 70% as measured by the MSCI World Index.

Chinese markets have been hit hard for many reasons. This includes its increased regulatory oversight on its corporate sector, weak economic recovery post COVID-19, geopolitical tensions between the U.S. and China over Taiwan, and a real estate downturn. As a result, the region’s equity valuations are now cheap in comparison to other markets as well as to its own past valuations.

Investors are pessimistic about China

Many institutional investors are currently avoiding Chinese equities. This sentiment is so extreme in that the investment industry is now producing emerging market vehicles that specifically exclude China. Investment funds have fled the country’s markets for most of 2023.

But history suggests that it doesn’t take much for an asset to climb higher from a point of maximum pessimism. Not only do we think markets are overly negative towards China, but we also see a few catalysts that may tip the scales in favour of Chinese equities in the short-term.

What can boost Chinese equities?

It’s not a big surprise that China’s policy makers stand to gain from increased confidence in its markets and the economy. In April, the country’s State Council, China’s cabinet, unveiled a series of steps that call for shareholder enhancement, corporate governance and tighter rules against market manipulation. It has also encouraged the country’s state-linked firms to buy shares to boost equity markets.

In mid-May more forceful steps were introduced such as lowering down-payment requirements for homebuyers and urging local governments to acquire unsold homes to support the country’s property sector. We think a further potential catalyst for China’s markets could come from the Chinese Communist Party’s plenum, or the gathering of the party’s elite decision makers, in July 2024. Some hints of an uptick in Chinese equities have already shown since April 2024 as seen in the chart below.

As we mentioned earlier, it’s not clear if the current policy measures are enough to revive China’s enviable growth rates of the past three decades. But we do think the policy measures might help Chinese equity markets post strong upside performance over the next six to 12 months from their current sold-off levels. We expect that the tactical contrarian China trade, backed by in-depth research by our multi-asset team, could help enhance our Granite portfolios.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by SLGI Asset Management Inc.?These views are subject to change at any time and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

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SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds. Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and Sun Life Financial Trust Inc., all of which are members of the Sun Life group of companies.

? SLGI Asset Management Inc. and its licensors, 2024. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.