Charting China’s comeback
Why it is time to be more positive on China again
Key takeaways
Key takeaways
- Investors were cautious about the Chinese market for three years. However, since the end of January 2024, the MSCI China has returned about 20%, which took some investors by surprise.
- After last year’s wild swings in investor sentiment, investors are understandably asking if this rally is sustainable this time. Given the risks that still exist, for example in the domestic property sector, but also externally from new import tariffs and strained US-China relations, the question is a fair one. However, we are seeing several encouraging developments, which make us think this rebound may be different from previous rallies.
- To start, the regulatory atmosphere has relaxed in China. New draft regulations for the gaming and after-school tutoring sectors marked significant policy shifts. We also see positive changes in the country’s effort to stabilize the property sector. On the international front, even without significant improvement in the relationship between China and the US, there are more engagement and communication between the two economic powers. Finally, domestic consumption is rebounding, though mainly concentrated in travel and leisure sectors, which are benefitting from the increased willingness to spend.
- These are meaningful changes and positive signals that investors have been looking for and that are needed to restore their confidence with investing in China. Nevertheless, China is still perceived quite negatively, which we believe lags behind reality. Case in point: China equity valuations remain well below historical average. Many investors may continue to see primarily macro and geopolitical risks and may fail to see how many Chinese companies are successfully navigating a very challenging and rapidly evolving environment.
- Summing all these positive factors up – the competitiveness of Chinese companies, their ability to adapt and innovate, the very attractive equity valuations and, in particular, the recent positive shifts in domestic policies – we believe it is time to be more positive on China again.
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