Why the sudden interest in Chinese equity markets?
While investors have shied away from China given the country’s recent regulatory crackdown and the troubles in its real estate sector, the near-term volatility seems to be creating an attractive investment opportunity going into 2022.
Let’s look at some key facts
- Globally, investors have been finding it much easier to invest in companies benefitting from Covid-19 disruptions rather than invest in Chinese stocks. But that may change as the global pandemic wanes back to normal.
2. American investors have largely avoided Chinese stocks in recent months as regulators are cracking down on major real estate developers like Evergrande, which has teetered on the brink of default since the summer.
3. Despite recent slowdowns from the real estate sector, China’s economy remains relatively strong compared to the globe at $25 trillion — with 4.9% GDP growth in the third quarter, solid exports and a stable currency.
4.Chinese regulators have tried to reduce the real estate industry’s reliance on high debt levels for growth, causing wider damage to Chinese real estate stocks. China’s real estate industry accounts for roughly a quarter of the country’s GDP.
5.With the regulatory cycle likely to fade in the next two to three quarters, there is “attractive” upside ahead and near-term volatility “should be viewed as an investment opportunity, not something to avoid.”
What is the US watching out For:
China’s regulatory crackdown is one of the top concerns for U.S. investors today behind inflation and the Covid-19 Delta variant, according to the Federal Reserve’s most recent financial stability report. Investors are especially worried about the troubles in China’s real estate sector causing a “spillover” into U.S. markets.
Blackrock the world’s biggest asset manager, has rejigged its Asia-focused portfolios to have more neutral positions on China, up from underweight, and narrowed its underweight call on internet services companies.
Discretionary spending probably won’t return soon to pre-Covid levels and upstream prices will moderate, keeping a lid on inflation, Liu said. Helped by an accommodative monetary policy, the environment is “more favorable” for growth stocks in China, according to BlackRock, which is investing around four themes in China — sustainability, self-reliance, social equality and data security.
What is India watching out for:
After a world-beating rally, sentiment on Indian shares has soured due to broker downgrades and concerns about tightening liquidity, worsened by a poor showing for the nation’s biggest initial public offering. By contrast, there is growing belief among investors that Chinese stocks could bounce back as the worst is probably over for Beijing’s regulatory scrutiny of private enterprises.
Chinese markets are also relatively inexpensive when compared to the US or India, which have surged to record highs this year while the Chinese CSI 300 which tracks the largest mainland listed stocks has dropped by 5% this year. An easy route to participate in Chinese recovery and growth from India is investing in China focused ETFs in the US which have low fees and good liquidity. Several US listed ETFs provide exposure to different sectors or themes within China. But these are all macro factors which are enabling FDI into China.
Always remember how difficult it was to earn the capital that you are deploying in equities. Be very careful on where you are investing it… Talk to us at Sinhasi Consultants if you want help with your risk analysis, corresponding asset allocation help or even portfolio allocations. We are always available at contactus@sinhasi.com. A good financial planner will be able to help you garner the best from a variety of options available.
Further reading
ECONOMIC TIMES: China regains favor with Investors who deem India overvalued
LIVE MINT: BlackRock says Time to Buy China Stocks and Trim India Exposure
