Domestic and overseas investor sentiment have both weakened after a brief rebound at the start of the year China ended its COVID lockdowns. The subsequent economic recovery has been slower than expected, in part due to continued weakness in the property sector. Externally, the macro environment in developed markets has also put a lot of pressure on the demand outlook for Chinese exports. Persistent interest rate hikes and a very strong US dollar have further weighed on Chinese equities.
After a challenging year, the comparative base should become more favourable. In addition, if the property sector stabilises, it will help broader corporate earnings and sentiment towards the overall equity market, which may lead to increased cyclical growth opportunities. There are companies that have been going through a very long destocking and earnings downgrade cycle that may finally be showing some positive signs of improvement.
Meanwhile, current valuations are still discounting a very negative outlook, which offers the opportunity to buy companies that have previously been much more expensive. We see long-term structural opportunities in the consumer space, especially those companies that are gaining market share with product premiumisation – consumers being willing to buy new products at a higher price point.
We are also encouraged by industrial and technology companies that are moving up the value chain and gaining business from China’s to increase its self-sufficiency. Renewable energy enablers are another pocket of the market that is well-positioned to grow with global decarbonisation initiatives. Additionally, some state-owned companies are moving forward with reforms and seeing improving profitability and cash flow generation, which could bring compelling long-term structural investment opportunities.
Our portfolios are predominantly positioned towards companies whose earnings are driven by the domestic economy. We are selectively positioned in stocks that have exposure to both the domestic and the export market, in combination with a very strong competitive advantage in the global arena.
Additionally, we take a holistic view when thinking about where companies are listed. This year, investor sentiment has been quite weak for both markets, but this had a relatively larger impact on the offshore market. Meanwhile, the southbound flow, which is mainly domestic investors buying Hong Kong-listed Chinese stocks using the Stock Connect Scheme, has been increasing in 2023.
Our job is not to call the market with a bullish or bearish recommendation. The idea is to bring balance to the overarching pessimism facing the Chinese equity market and remind investors of what the overall opportunity set looks like, helping them make more informed decisions.
Chinese equities have been volatile with domestic and external macro challenges and the geopolitical environment has not been helpful. But we firmly believe that by sticking to fundamental, bottom-up stock selection, this negative sentiment provides an attractive entry point to invest in some great companies that are positioned to deliver attractive returns.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that, in certain market conditions, the value of the portfolio may decrease whilst more broadly-invested portfolios might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Commodity-related investment: Commodity prices can be extremely volatile and losses may be made. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.