Numbers might give you some comfort but they don’t tell the whole story, according to CFS. To get that, you have to dig a little deeper – and take a lot of meetings.
The passive giant’s former super boss has found a new home at Bell Asset Management, and comes into the increasingly tough business of active management with his “eyes wide open”.
Year of the Tiger brings new China opportunities
Some “Tiger-ish confidence” is warranted for China investors as regulatory upheaval eases and authorities target economic growth and stability.
“After roaring back from the initial COVID outbreak, the Chinese economy has been through a more difficult spell,” writes Ninety One in its latest China report, titled “Tiger, Tiger: What investors can expect in the Chinese New Year.”
“A policy of deleveraging led to a reckoning for some highly-geared property developers, while a slower pace of investment growth – combined with power shortages and occasional local COVID lockdowns – induced a sharper slowdown than many had expected.”
“Now, though, the shift by China’s policymakers towards providing more support to the economy should offer a tailwind for Chinese stocks.”
Charlie Dutton, Ninety One portfolio manager for Asia Pacific equities (photo at top), believes that there is now more clarity on the actual economic impact of China’s regulatory upheaval – and that the speed and uncertainty of that upheaval, rather than the regulations themselves, were the primary driver of investor flight away from China.
“Looking at the sector now, investors are in a better position than during the crackdown, since they know more about the environment these companies will be operating in, which affords greater certainty on the strengths and limitations of business models,” Ninety One’s report says.
“As near-term regulatory noise fades, the long-term drivers of structural growth come back into focus. These trends – among them, rising wealth and the expansion of the middle class; digitisation; and China’s push for self-reliance in certain tech sectors – remain intact, and hence continue to be tailwinds for select Chinese firms.”
China’s 2021 policies focused primarily on wealth distribution, the environment, national security, the curbing of financial risks, and anti-monopoly regulation. But the majority of those policies will likely take a backseat in 2022 in favour of one key goal: growth stabilisation.
“2022 is going to be a year of stability and supporting growth. On the margin, this means that tight policy in some areas, like internet regulation, will have to be loosened, which we saw indications of at the end of 2021,” the report says. “Yet stimulus is going to be gradual because policymakers want the economy to transition to a new equilibrium.”
“Depending on how the economy performs, policymakers could decide to pursue a stronger stimulus sometime in the coming year. In other words, whereas the theme of 2021 was regulation and deleveraging, the themes for 2022 will be gradual stimulus and a search for stability.”
But investors should still be aware of one of the bigger threats to the market – a potential flare-up of geopolitical tensions – and react accordingly by focusing on companies that are domestically-oriented.
“Should Washington and Beijing get their claws out over trade and national security, home-focused businesses are more likely to be shielded from the heat. However, care is needed on valuations… some Chinese companies are trading on excessive multiples, way ahead of their earnings potential,” the report says.
“That said, with improving earnings momentum and market interest widening into a broader array of stocks, against a more positive economic backdrop, there should be good opportunities.”
