By Tom Westbrook
SINGAPORE (Reuters) – Global investors who have historically bet on China’s economic development are ditching grand narratives of long-term prosperity and instead adopting more modest views that see the market as an opportunity for smaller bets with quicker payoffs.
Frustration over Beijing’s efforts to shore up faltering growth and fading investor conviction over where the economy is headed have kept stocks moving sideways, despite some initial excitement over promises of stimulus last year.
The lack of investor consensus and increasing policy uncertainty have fundamentally changed the way analysts and money managers see China’s domestic markets and have tightened their investment horizons.
“People basically take China as a trading market,” said Goldman Sachs’ China equity strategist Kinger Lau. “If they see the catalyst, they will come in, but after a short period of time, they will sell and take profits.”
Lau is positive but says clients want to “wait and see,” and it’s hard to engage them on China until there’s clarity on both President Donald Trump’s plans on China and Beijing’s response.
Last September, the benchmark Chinese stock index surged 40% in two weeks after the Communist leadership and regulators signalled stimulus was in the offing. The yuan jumped and a long rally in the bond market, driven by risk aversion and economic gloom, was stopped in its tracks.
But Beijing’s eventual measures – headlined so far by plans to restructure local government debts, among other more modest initiatives, and for the central government to borrow more – lacked detail and urgency, underwhelming markets.
By October, hedge funds that enjoyed the market surge had mostly gotten out, according to Goldman Sachs. A Bank of America survey of fund managers shows only 10% of investors expect a stronger Chinese economy in a year’s time, down from 61% in October and almost a quarter say they are underweight on China.
The bond rally has resumed in earnest and the yuan, though lately enjoying a fillip from a dip in the dollar, is not far from post financial-crisis lows.
Half the gains in the CSI300 index have vanished and four years into a bear market the index trades where it did a decade ago. It is down 3% through January and overall, those who have waited patiently since China’s post-pandemic reopening two years ago have lost 7% in Chinese stocks.
FRAUGHT OUTLOOK
Making things harder for the traditional long-term investor is an increasingly volatile macro outlook.
While Trump has started his term with a softer-than-expected stance on China, most expect a tariff hit is on the way. Meanwhile, a detailed Chinese stimulus plan remains elusive.
HSBC’s head of Asia research, Joey Chew, said domestic issues and external risks mean the outlook for the currency is “very tricky.”
“Domestically, I think what would help is if we get more clear signs of fiscal stimulus and that could kind of spur growth, because we’ve been seeing capital outflows again,” Chew said.
Amid the numerous competing pressures, Chinese policymakers face a difficult task anchoring market expectations.
The central bank, for example, must balance interest rates, keeping them low enough to encourage growth but not so low as to drag the currency to ever deeper multi-month troughs.
Earlier this month, People’s Bank of China Governor Pan Gongsheng said rates and bank reserve rules would be adjusted to supply liquidity, in what markets saw as a hint that the bank would cut rates.
Yet, the PBOC also acted to temper markets’ enthusiasm about looser policy and a weaker currency: it suspended its own bond buying programme, lifting yields, and announced a plan to own more reserves in Hong Kong.
“Beijing wants a stable exchange rate, lower interest rates, no capital outflows, and an economic recovery,” said Arthur Budaghyan, chief emerging markets and China strategist at BCA Research. “It will be impossible to achieve all of these simultaneously.”
To be sure, some investors say Chinese markets are still relatively cheap – with a forward price-to-earnings ratio around 11 for the Shanghai Composite compared with 22 for the S&P 500 and that opportunities abound for stock picking.
“It’s not for everyone,” said Ken Peng, head of Asia Pacific investment strategy at Citi Wealth.
“But I do think that China is going to be a very rich source of alpha for this year,” he said, noting domestic tourism and some areas of online education as apparent bright spots.
Others see unpredictability as reason to avoid stock picking.
“Things can change quickly,” said Karsten Junius, chief economist at Switzerland’s Bank J. Safra Sarasin, which has a neutral position on Chinese equities.
“What we recommend is not trying to pick the winner. We cannot in advance, identify sectors that might either be favoured by the Chinese authorities or fall out of favour.”
More broadly, however, the market’s inertia is holding buyers back.
Even an announcement last week that mutual funds and big insurers would be directed to increase stock buying, something Citi analysts anticipate could drive at least an extra 820 billion yuan in annual inflows, didn’t drive much of a boost.
The Shanghai Composite rose just 0.5% after the announcement.
“To me, it (China) is something people trade versus invest in,” said Rob Almeida, global investment strategist at MFS International, pointing to problems from real estate to demographics.
“We do have some assets there – a couple of video game companies, a couple of consumer staple companies, but it’s very, very selective.”
(Reporting by Tom Westbrook; Additional reporting by Vidya Ranganathan in Singapore, Kevin Buckland in Tokyo, Reuters staff in Shanghai, Alun John in London and Summer Zhen and Jiaxing Li in Hong Kong. Editing by Sam Holmes)
