I'm bullish Asia for a very long time now and still is. I would not be putting 1/3 of my investments in the hands of PTM to manage, If I was not. It good to recognise that it is not a place for the faint of heart. It never was and still is. Anyone that invests in Asia needs to recognise the current headwinds else they are just weak hands. Predicting how markets behave is never simple; with China in particular it’s damn near impossible. Another reason why I went with PTM instead of doing this myself. At the end, you’re left with a long list of ‘known unknowns’ that makes investing in China riskier than most developed economies. The known unknowns for me are:
1. The consensus forecasts for China’s economy is to expanding by only 5.5% over 2022 (a slump on the 8.1% recorded last year), a serious lag on the past four decades’ average 10% annual growth. Last year’s sudden wave of regulations saw Chinese stocks, which have enjoyed a near impregnable rise in recent decades, come crashing down to earth. If we remove the perennial 'wooden spooner' South America, China was the worst-performing major equity market across the globe last year.
2. The property market remains an issue. It is a weight on the economy. Property comprises around 15-20% of the country’s GDP. A household’s property costs alone can swallow 70% of disposable income, more than three times the average in developed countries. While the collapse of over-indebted property group, Evergrande, threatens to bring down the rest of the market with it.
3. The geopolitical situation and CCP policy. It’s hard to know exactly what this will amount to (trade frictions are a perennial concern), disputes on the international stage threaten to catch investors off guard. The trigger for the collapse in point 1 above was a shift in stance from the CCP that now puts ‘common prosperity’ at the fore instead of the business elite. Regulators homed in on sectors like technology, education and gaming. The country’s Big Tech firms, such as Alibaba and Tencent etc slumped.
4. Last but not the least Covid and the country’s ‘zero-Covid’ policy. It doesn’t take much to close a Chinese city these days. The 1.2 million residents of Yuzhou were told to stay inside earlier this year after just a handful of asymptomatic cases were discovered.Admittedly the issues above have put investors in a mind frame that China's long-term structural growth story is undermined. So lets consider the positives which mind you is always going to come into the future. When most investors are concerned in the now, I think its best to grab the bulls by the horns before it goes into a rampaging ride. The positives are:
5. The CCP foresaw the coming inflationary headwinds and dealt with it before it became an issue. There’s little reason to think that the points above dealt China’s growth a lethal blow. The consequences are stark, but it’s worth remembering that the rest of the world turned up its regulatory efforts last year too. The difference was that China’s efforts were more successful. Its one-party state reigned companies and inflation far more quickly than the US and Europe could ever hope to. Catching investors off guard, a swift correction was inevitable and a swift recovery is now in the cards.
6. The The CCP’s stance is also likely to soften in the run up to its 20th Party Congress in November. While there is still risk of new regulation, there is a good chance that we are near or close to a “peak” in terms of news flow. This year could mean improved policy transparency and fewer market wobbles. Historically, equities have performed well ahead of the CCP party Congress.
7. China’s discount to global equities is near an all-time high, while corporate earnings are forecast to grow over 15% for the next 12 months. Longer term, many of those broader themes that have made China so attractive remain intact. The country is still scheduled to become the world’s largest economy over the next decade, while thriving consumer and green energy sectors retain government support.
8. The world monetary backdrop offers those bullish in China a massive leg up.Thanks to point 5 above, China is now at a different cycle from western governments, it has more room to encourage growth than the US or the rest of the world. The monetary tightening in the rest of the worlds governments and CBs due to the ongoing inflationary concerns will absolutely drive foreign investors back to China.
As I said above. Best to recognise the current headwinds, keep an eye on the tailwinds and when the price is right grab the bulls by the horns before it goes into a rampaging ride.
(20min delay)