It can often feel as though China is never out of the news, and indeed last month’s 20th Party Congress resulted in a flurry of commentaries and thought pieces from international media outlets. With President Xi strengthening his power and opposition leaders fully replaced by loyalists, questions were raised around what this means for China, the economy and markets going forward.
The MSCI China Index was down 8.2% in a single day post the Party Congress, with HK-listed stocks and ADRs bearing the brunt. This move, adding to a 63% decline since February 2021, brought the index’s valuation to more than two standard deviations below its three-year average. The Hang Seng Index also returned to 1997 levels.
Evidently, it’s been a turbulent period for stock markets in China, however as seasoned equity investors in the region, we’re very much used to unpredictable market movements and investing through cycles. Short-term market shocks can create opportunities to buy quality stocks at a significant discount to what we assess is the fair value of the underlying business and economy. We focus on using such opportunities to find good businesses that we still believe in, while keeping an open mind to calibrate the growth outlook as we go.
In our piece, we discuss five key issues – the recent 20th Party Congress, Zero-Covid policies, Taiwan, U.S. trade tensions and domestic economy issues – and their potential impact on the economy. We also talk about our role as active stock pickers, and the importance of our bottom-up, ‘on-the-ground’ research. Higher volatility is likely to continue for Chinese equity investors, which means higher specialisation will be warranted, both in understanding China and industry dynamics. This is an asset class for active managers who fully understand the markets and the region.
Overall, we believe that the investment case for China looks uniquely compelling and we believe in staying invested. China is the world’s largest trade partner, inseparable to the global economy, and a powerhouse leading global economic growth. It is, as we always say, an investment opportunity too big to ignore.
Please read the full piece here.