What’s also still overlooked is that China is well-positioned for new structural opportunities that go well beyond tech and the consumer.

By Yingying Wu, Portfolio Manager at DNCA Finance

By almost any measure, it’s been a year to forget for Chinese stock owners. Facing a series of headwinds, including a regulatory reset, property market slowdown, and less accommodative central bank (the People’s Bank of China, PBoC), the MSCI China Index has slumped -16 percent this year1, its worst year since 2018.

Many high-profile tech stocks have sunk further, even as global stocks soared. Little wonder, then, that some investors are throwing in the towel.

Serious Buying Opportunity

For longer-term investors, though, the recent sell-off presents a serious buying opportunity – especially as the worst looks to be over and has arguably been priced in. China’s stocks are trading at an undemanding forward P/E ratio of around 13, down from a high of 17 earlier this year.

That means China is cheaper than many of its Asian peers and much cheaper than the US, where the S&P 500 trades at a forward P/E of 21.4 based on sky-high earnings estimates2.

Eye-watering Yields

While China’s manufacturing remains in contraction, the worst of the property and energy crises looks to be over, with Chinese growth still forecast for over 5 percent next year, according to the IMF3. Its credit impulse has bottomed too. And in a show of confidence, bond investors are flocking back into Chinese high yield, enticed by eye-watering yields as high as 25 percent4. Spreads have since come in, a sign the latest stress is waning.

Most important, though, the PBoC looks ready to ease monetary policy again – just as other central banks around the world tighten. The Bank is unlikely to throw the kitchen sink at the economy as they did in 2008 and 2015. Yet they have shown little appetite for further weakness or a snowballing crisis.

Tailwind For a Stock Market

That should offer a tailwind for a stock market that, though prone to selloffs, rarely suffers prolonged or multi-year drawdowns and has kept pace with the MSCI All Country World Index since 2006.

What’s also still overlooked is that China is well-positioned for new structural opportunities that go well beyond tech and the consumer.

Viewed as something of a pariah at COP26, behind the scenes there’s been a push by policymakers to promote an energy transition that’s now in full swing. This includes introducing subsidies to support new technology development (energy storage, offshore wind, etc.), green certificates and carbon trading schemes, fossil fuel energy consumption caps, and giant wind and solar projects in Northwest China.

The World’s Largest Battery Makers

Chinese coal plants may still dominate headlines, yet China probably has the greatest number of listed renewable plays in the world today: Chinese firms have between 70 and 80 percent5 of global market share in solar panels, across the entire supply chain. When it comes to wind, meanwhile, companies like Xinjiang Goldwind have surpassed Danish disruptor Vestas in total turbines, and their technology is closing the gap.

Likewise, for electric vehicles. Tesla may be American, but China boasts the world’s largest battery makers with the most advanced technologies and sophisticated manufacturing. And it has leading electric vehicles (EVs) brands that can capture market share, particularly at home, as local consumers continue to embrace EVs.

At The Forefront of Transformation

Finally, we see abundant opportunities as China continues to modernize. This includes healthcare (as the population becomes older but wealthier), self-sufficiency technologies (i.e., semiconductors), domestic consumption brands (with a growing middle class) and digitalization in areas with low penetration (i.e., software). In all these areas, China’s unwillingness to cede technological dominance to the West means it will remain at the forefront of transformation, providing opportunities.

After a year of stock market turmoil, the Chinese dragon is stirring once more. Perhaps it’s time to return to the growth engine of the world?

1 Figures as of 22 November 2021
2 Price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS)
3 IMF, November 2021, https://www.imf.org/en/News/Articles/2021/11/18/pr21338-china-imf-staff-completes-2021-article-iv-mission-to-the-peoples-republic-of-china
4 Source: Bloomberg
5 Source: International Energy Agency

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