Year of the tiger: 4 key themes


China is back in the international spotlight with two key events this week: the start of the Year of the Tiger on Tuesday and the Winter Olympics in Beijing on Friday.

In 2020, China’s rapid recovery from the pandemic made it the best-performing stock market in the world, but that seems like a long time ago these days. The country is now following a Covid-19 containment policy that could put a damper on certain elements of its economy such as construction. The Morningstar China Index fell 21% in 2021, after gains of more than 30% in 2020. The index is down nearly 5% since the start of this year.

While Morningstar’s coverage includes a range of emerging market funds, they are dominated by Chinese stocks, with only two China-specific funds rated Bronze or higher: FSSA Greater China Growth, which is rated Gold, and JP Morgan China. Growth & Income (JCGI ), a Silver rated trust. The FSSA fund managed to buck the index’s trend of weakness by posting gains of 4.7% in 2021, after a 27% gain in 2020. JP Morgan Trust’s share price fell 25% in 2021, after a stellar increase of 95% in 2020.

Here’s a look at some key themes from China’s Year of the Tiger, compiled with the help of some fund experts.

Regulation

Beijing’s reach stretched from education to computer games last year and investors were spooked by both the scope and the suddenness of the intervention. Under the banner “Common Prosperity,” Xi Jinping showed off the government’s power to shape the economy as it sees fit, providing yet another reminder of political risk for fans of emerging markets.

Dale Nicholls, manager of Fidelity’s China Special Situations Investment Trust (FCSS), believes a certain amount of turmoil will be beneficial to the economy in the long run.

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“There is a good chance that we are well into, if not past, the peak of regulatory reforms, particularly within the tech sector; I would not expect the same degree of intensity that we saw last year and into late 2020 to continue.”

Beijing’s aim to spread China’s growing wealth could be seen as an opportunity, adds Jimmy Chen, manager of the Comgest Growth China fund. “Stock pickers like us need to incorporate government agenda and regulatory risk into their stock selection. We wonder if the actions in our portfolio are aligned with government goals or not. It’s as simple as that”.

Examples of challenging brands to tap into rising revenues include jeweler Chow Tai Fook, sportswear brand Anta, and consumer appliance firm Midea, all local successes.

Ratings

At the end of 2020, the consensus was that China’s stock market was now highly valued, if not overvalued. The opposite could now be argued after a difficult period for investors. While the great busting of the US tech bubble may only be beginning (my colleague John Rekenthaler argues this is what is happening), Chinese stocks have already broken through the bubble and beyond, managing director argues of FundCalibre, Darius McDermott.

“The wild share price declines of the past six to twelve months have left the valuations of many high-quality Chinese companies at much more attractive levels and many of the major headwinds to the Chinese stock market are either dissipating or are now dissipating. largely reflect. in share prices, or both,” he says.

Chinese stocks are trading at a 35% discount to US stocks, the biggest since the financial crisis of the 1990s, says Jacob Mitchell, founder and chief investment officer of Antipodes Partners. However, some companies still look expensive despite the liquidation, argues Wenchang Ma, co-portfolio manager, All China Equity, Ninety One.

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“Some Chinese companies are trading at excessive multiples, well above their earnings potential,” he says.

Inflation and rate hikes

While the western world is preparing for a series of rate hikes to control inflation, China appears to be going in the opposite direction, easing monetary and fiscal conditions. “2022 could be the year that inflation takes off around the world. If so, China could prove to be a safe haven, as inflation remains low and monetary policy is easing,” says Comgest’s Chen.

Meanwhile, in China itself, the argument for a more accommodating policy (effectively putting money into troubled sectors like real estate) has gained ground. That is the position of the chief economist of Mirabaud Asset Management, Gero Jung. Commercial banks are lowering lending rates, which should support the housing market.

Support measures from China’s central bank, the PBOC, could also help stock returns, at least in the short term, says Janet Mui, head of market research at wealth manager Brewin Dolphin. “This increase in liquidity is historically a major driver of rallies in the Chinese stock market, possibly more so than economic or corporate fundamentals,” he says.

Geopolitics Ever Present

China’s economy and stock market may perform decently in the Year of the Tiger, but at what cost? There are many reasons for investors to be anxious about the bellicose nature of the Xi Jinping regime. The end of the Trump era has not signaled a new detente in US-China relations, and the trade war between the two nations is alive and well. Furthermore, recent crises, from Kazakhstan to Ukraine, have strengthened Russia’s power and drawn it toward China against the West.

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In the Pacific, China is expanding its naval power, worrying Japan and Taiwan in particular, and unrest in Hong Kong remains a live affair. The Winter Olympics are also drawing attention to China’s treatment of Uyghur ethnic minorities: this weekend New York Times It carried a full-page advertisement for the Elie Wiesel Foundation for Humanity, the human rights charity created by Holocaust survivor Elie Wiesel. The announcement called on athletes and corporate sponsors to boycott the games unless Beijing takes steps to reunite Uyghur families.

Guy Monson, chief investment officer at Sarasin & Partners, says Beijing continues to be at loggerheads with the United States and other trading partners.

“China’s move away from the West intensified in 2021, with its increased assertiveness toward Taiwan, a tighter security regime in Hong Kong, and restrictive economic policies directed at countries like Lithuania, Canada, and Australia,” it says.

And Chetan Sehgal, Senior Portfolio Manager at Templeton Emerging Markets Investment Trust (TEMIT), notes that the political standoff between the US and China continues to affect the listing of companies from both countries. “The United States recently finalized rules to force Chinese companies to be delisted from US stock exchanges if they fail to meet US audit inspections and other requirements,” it says.


www.morningstar.co.uk

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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