Our Year of the Tiger outlook for China is bright

Investing in China has been challenging in the recent past. However, if you believe that the Chinese will continue to upgrade their lifestyles, it may be worth to take a contrarian approach and turn optimistic on China, Tan Jia (TJ), Head of Research for China at O’Connor told us. Tan Jia shares five insights on investing in China in the Year of the Tiger and beyond.

The good news here is that Beijing has already announced a slew of pro-growth policies in December 2021to counter the painful restructuring ones it implemented earlier in the year.

However, the question we need to ask is whether those policies can help turn things around in the short term. The property market continues to worry investors. As with many restructuring situations, things could get worse before it gets better.

TJ believes that we could see stronger growth momentum in the second half of the Year of the Tiger as that is when China will be holding its 20th National Congress.

Tigers are bold. Let’s emulate them this year and be contrarian on China.

TJ points out that over the last 40 years, China has been “growing richer and stronger”.

So if you are convinced that the Chinese will continue to upgrade their lifestyles, and China will carry on with reforms, consider being contrarian and turn optimistic even if most investors stay bearish.

TJ notes that the Chinese market rewarded investors after the challenging years in 2008, 2013 and 2018.

Large internet companies experienced a tough year in 2021. Although most investors were focused on the regulatory risks, weaker economic growth also impacted their fundamentals and financials.

While the most challenging period may have passed, TJ continues to be conservative in his outlook. He believes that company fundamentals may not turn around quickly as they continue to face multiple headwinds, a further slowdown of economic growth and the continued implementation of China’s zero-COVID policies.

So, it’s not yet the right time to call tech a beta opportunity. Regardless, we want to be selective and focus on future long-term winners with competitiveness intact and a clear catalyst in sight for them.

As a relative value investor, we can also use short selling as a risk management tool to protect our long positions. This is why we are excited about changes to the security lending rules in November 2020. These new rules allow us to access securities borrowing facilities through mainland brokers to carry out short trades.

As an international hedge fund manager, this change has also allowed O’Connor to offer a China long/short solution referencing A-shares to investors outside of the country. Global investor demand has been very positive and despite the market turmoil, we have managed to protect investors’ capital through this approach.

TJ believes that 2021 marked the turning point for the China property sector. After the boom cycle of the last 20 years, the sector is primed for consolidation with private developers playing a less important role in the coming years.

“I believe it’ll take another three to six months for the sector to bottom-out,” TJ shares. During this time, he expects that —

1. Developers will need to work on ironing out their finances;
2. Local governments will likely step in to work things out with these developers; and
3. Only after these efforts can we expect to see more enabling policies for the sector.

TJ sees these enabling policies as the possible light at the end of the tunnel. However, he cautions that even with that, some highly levered private developers are not likely to survive this phase. This could possibly present shorting opportunities to relative value investors like O’Connor.