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Graph of the Week - China’s stock market makes new lows

By ANDREW CRAIG 02.02.2024

In this article:

    China’s stock market has been one of the worst performing in the world, with the Shanghai Shenzhen CSI 300 dropping by around 20% since August 2023 (see Exhibit 1). This fall is partly due to steadily deteriorating expectations of China’s growth — aggravated by underwhelming macroeconomic and fiscal stimulus.

    In recent weeks, China’s authorities have announced measures to bolster stock markets. This follows a dismal start to the year for Chinese stocks with Tokyo overtaking Shanghai as Asia’s biggest equity market, while India’s valuation premium over China has hit a record.

    Confidence in China’s economy remains depressed despite the recent efforts by China’s government to add stimulus. Measures undertaken include facilitating access to long-term cash for banks, tightening rules on the lending of shares for short selling and broadening developer access to loans.

    Nothing so far has led to a meaningful turnaround in either economic activity or in the ongoing stock market selloff that’s wiped out some USD 6 trillion in value.  The onshore benchmark CSI 300 Index has recently slid as much as 1.3%, on track to wipe out all gains in the last week of January spurred by hopes of stronger government support. A gauge of China stocks listed in Hong Kong lost as much as 1.8%.  The offshore yuan was little changed, while China’s 10-year government bond yield dropped to 2.43%, at the lowest level since 2002. The Australian dollar — which is risk-sensitive and seen as a proxy for China — declined 0.5%.

    Here are the factors our Multi Asset investment team are taking into account in assessing the outlook for Chinese stocks: 

    • Earnings: On some measures, China looks to be the weakest of global equity markets. The net upgrade ratio and the percentage change in consensus earnings-per-share forecasts are both poor. From a cyclical perspective earnings may be depressed but there is little evidence of mean reversion.
    • Monetary policy: At the margin policy is certainly easing, but at the moment, we do not see it as sufficiently material to offset the drag from the real estate crisis.
    • Valuations: This remains the central part of a bullish thesis with traditional equity multiples at historically low levels. However, a low multiple does not necessarily equate to value as long as profitability trends remain unattractive.
    • Sentiment: Investor sentiment is depressed. Admittedly, this could act as a contrarian support for Chinese equities.
    • Price trends in Chinese stock indices: The pattern of lower lows and lower highs continues, and the slope of various moving averages remains negative. 

    On this basis, our Multi Asset team have little appetite to take advantage of the recent sell off in Chinese equities given the opaque nature of the policy reaction function. There could be short-term opportunities on the basis that some of the fall in markets in the last two weeks was based on forced selling and unwinding of structured products. There have been three rallies exceeding 10% in the last 12 months despite the firm downward trend.


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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