IS IT time to think about investing in China again?
The world’s second-biggest economy remains in the strictures of Covid, while much of the rest of the world emerges and battles with high inflation and interest rates.
But in recent weeks there have been signs that things might be turning economically, says James Syme, co-manager of Pendal Global Emerging Markets Opportunities fund.
“China’s had a very difficult run in terms of economic data and market performance. That’s been driven by both Covid and tight lending policies, particularly towards residential mortgages.
“There’s no sense that the economy is in crisis, but it is unusual to have this deep a slow-down.
“To the end of April there was a real sense of doom and gloom around the Chinese economy and assets.
“But what we saw in the May data was clear evidence that some parts of the Chinese economy are doing better,” Syme says.
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As is typical in turning points, there is no irrefutable evidence that the Chinese economy has bottomed, Syme says, but the next few months of macro-economic data will be worth watching.
“The M2 money supply number we track was up 11 per cent in the month of May. New loans were reasonably strong. The annual rate of growth in the credit system has picked up to 9.1 per cent.
“We are not yet at a full-throttle, credit-driven recovery, but certainly there’s been a turn in those numbers,” Syme says.
“There’s been a turn in some of the economic numbers also. Industrial production has gone positive, having been negative. Fixed asset investment is picking up.
“But — and it’s a big but — the overlapping combination of residential property and the consumer remains phenomenally weak,” he warns.
The improvement in the past six weeks in the Chinese economy is largely thanks to a surging trade balance (whereby imports have fallen and exports have remained strong) and government spending.
“China is still in Covid and one of the things we saw around the world was that governments ramped up fiscal spending to support economies during the pandemic. In the second half of 2022 we might see China do that.”
What are the implications for financial markets?
“There’s been a more positive tone to Chinese equities in the past couple of months,” Syme says, highlighting that most major bourses and many asset classes from bonds to cryptos have been sold off in that period.
“China’s equity market is up. Not a lot, but it’s up. There’s more positive news around the tech sector and some property-related assets.”
Commodity prices, which affect the Chinese economy, remain an unknown.
“There’s been a lot of concern that commodity prices are generally very high at a time when the Chinese economy is weak and questions about whether they can be sustained,” Syme says.
“But another way of looking at it is commodity prices are where they are, even though the Chinese economy is weak. If demand-supply remains tight and you get a Chinese recovery, then prices could move even higher.”
So, is it time to invest more heavily in China?
“I think we need to see more evidence of a fully-fledged recovery. But we are starting to see some evidence of change.
“Six weeks ago, if you looked at the Chinese economic data, you’d say there’s nothing to do here,” Syme says.
“We are not at the point where you look at the data and say you need to be overweight China, with a highly cyclical portfolio.
“But the things you want to see are starting to emerge, and that’s a shift.”
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
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