Will ‘Year of the Snake’ be good or bad news for China?

James Yardley 22/01/2025 in Asia/Emerging Markets

China’s economy ended the year with a skip in its step – or speed in its slither, given the imminent Year of the Snake – suggesting that the long-awaited stimulus may already be having an impact. Investors remain sceptical, with markets making little progress since their bounce in September. Will 2025 deliver a slippery ladder higher for investors in China?

Chinese GDP just about hit the magic 5% figure in 2024 – the Government’s stated target – with clear signs that price deflation is in retreat. “With a package of incremental [stimulus] policies . . . confidence was effectively bolstered and the economy recovered remarkably,” said the country’s National Bureau of Statistics. Nevertheless, economists highlighted a two-speed economy, where strong exports and manufacturing are offsetting weak household sentiment.

It is hoped that the government’s stimulus will help with this weakness. The Government lowered interest rates, injecting liquidity into the financial system. This aimed to improve access to funding and support business activities. It should also help address the ongoing property sector weakness by pushing mortgage rates lower and easing pressure on homeowners. There were also measures to boost the stock market and encourage companies to buy back their shares.

However, there are some serious concerns. China is in the sights of the incoming Trump administration – the first in the queue for tariffs. The new president has said that he will sign an executive order imposing an additional 10% tariff on China until it cracks down on fentanyl smuggling*.

There are also worries that the stimulus measures do not go far enough to address China’s structural weaknesses. There were few measures to support the consumer, for example, which has been a significant weak spot for the Chinese economy since the pandemic. In this regard, Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, believes the upcoming annual National People’s Congress gathering in March will be a crucial event to monitor. “We will watch to see if Beijing announces more forceful fiscal stimulus measures to sustain growth into 2025, as current stimulus efforts may lose momentum in the new year.”

The message from fund managers appears to be that there are selected opportunities, but the market requires careful handling, with potential volatility until the extent of Trump’s tariffs become clear.

Rebecca is looking for opportunities in the consumer discretionary sector, which she believes should benefit from increased household wealth due to stabilising housing prices. “We are also increasing exposure to cyclical sectors like the EV battery space, where supply-and-demand dynamics are showing marginal improvement after a prolonged industry downturn.”

The market does, at least, have valuation on its side. The Shanghai Composite has gained 18% over the past 12 months, with most of the gains coming in the immediate aftermath of the stimulus package in September. However, valuations are still low on most measures. The forward price to earnings ratio of the Chinese market (as measured by the MSCI China) is just over 10x. That compares with over 18x for the MSCI All Country World index**.

Charles Bond, manager on the Invesco Global Emerging Markets fund, says: “In China, the prices the market is willing to pay for some businesses appear to bear almost no relevance to even a very conservative estimate of value.” He points to companies such as Autohome, where growth prospects have dimmed a little, but the company is still cash rich, with cash equivalent to approximately 100% of the market cap. The company trades on 12x earnings and about 10x free cash flow, says Bond, and has good growth prospects ahead***.

Xavier Hovasse, head of emerging equities and fund manager on the FP Carmignac Emerging Markets fund, says that the volatility associated with the new president may have been overplayed. “We anticipate that the economic decoupling between the US and China will not have the severe negative impact expected by the market. Notably, China’s exports to the US constitute only 13% of its total exports.” They are maintaining a ‘measured allocation’ to China, having reduced their weighting somewhat after the rally surrounding the stimulus measures.

Direct investment in China remains a risky prospect, and there is likely to be volatility until there is certainty about the tariff regime. However, given low valuations, and China’s dominance in a number of key sectors, including green energy, online shopping and software development^, there are pockets of opportunity, and the gains could be significant. At a time when other areas of global markets are highly valued and look vulnerable, it could be worth another look.

*Source: BBC news, 26 November 2024

**Source: MSCI index factsheet, 31 December 2024

***Source: fund update, Q3 2024

^Source: IBIS World, December 2024

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