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Global Equities: the case for China stocks

‘If you don’t own China today, you’re going to miss out,’ says Samir Mehta, manager of Pendal Asian Share Fund. Here’s why

INVESTORS nervous about the outlook for China are not accounting for the fact that Beijing has a track record of rapid policy change — and could move quickly to bolster the faltering economy, says Pendal’s Samir Mehta.

A policy-led resurgence in Chinese growth could spark a rally in Chinese stocks battered by regulatory crackdowns, a slumping property market and the fight to suppress COVID outbreaks.

(Listen to this fast podcast from Pendal’s head of income strategies Amy Xie Patrick for a fixed interest perspective on China).

“When Xi Jinping came to power in 2013, he quickly changed the incentives in the system away from pure GDP growth to what he ultimately termed ‘common prosperity’ — reducing inequality, balancing growth and promoting fairness,” says Mehta, who manages Pendal Asian Share Fund.

“If that meant you had to take down the education sector, the internet sector and the property market, you do it. The incentives changed and society began to re-orient itself.

“Policies can change on a dime in China — and my sense is we are on the cusp of them doing something to ramp up economic growth.”

Under pressure

China’s gross domestic product rose by an annual 4.8% in the first quarter. The economy is under pressure from regulatory constraints on the real estate industry and lock downs as authorities struggle to contain Covid.

A quarter of China’s population lives in cities that are now under some form of pandemic lockdown.

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Pendal Asian Share Fund

The first clues that Beijing wants to re-start growth have come in reports that Xi is calling for a boost in infrastructure construction and a statement from last week’s Politburo meeting promising stimulus.

“We should waste no time in planning more policy tools and enhance the strength of adjustment in due course,” the Communist Party’s Politburo said Friday, according to a readout of a meeting of the leadership on state broadcaster China Central Television.

There have also been reports that Xi is meeting tech giants this month in a sign of easing regulatory pressures.

And newspapers last week reported Xi had told officials to ensure the country’s economic growth outpaced the US this year.

Expect stimulus

Mehta expects further policy effort to stimulate the economy is on the way.

“During lockdowns in the US, among many other schemes, the government handed out $600 additional monthly payments to households.

“What’s to stop the Chinese from doing something similar?”

Mehta expects fiscal action to dominate because monetary policy is more constrained by the global environment.

“In face of the rapid depreciation of the Japanese Yen, the Chinese renminbi has depreciated by almost 2.5% in the past week.

“The People’s Bank of China needs to be very careful about the externalities. The worst thing that could happen is if they loosen monetary policy in a big bang and are faced with capital outflows, which could result in a further weakening of the currency and have ramifications and unintended consequences.

“Monetary policy cannot be done in isolation, whereas fiscal policy can.”

Risk for investors

The risk for investors is that Chinese policy changes can come “at the drop of a hat”, says Mehta.

He points to the rapid reversal of Beijing’s climate commitments after last year’s UN climate conference.

“Chinese authorities said they were focused on not using fossil fuels and reducing coal consumption — and then the war in Ukraine exacerbated an energy crisis. Restrictions on fossil fuels have been shelved as a result.

“China’s coal consumption is back approaching all-time highs.”

Mehta says a change in policy on economic growth or zero-COVID will have profound impacts for investors.

“Charlie Munger said ‘show me the incentive and I’ll show you the outcome’ and China is all about incentives.

“For 30-plus years, there was just one incentive for everyone in government — GDP growth. What was surprising is that China achieved that GDP growth year-in, year-out.

“But incentives can change on a dime: one thing we know about the Chinese authorities is that when they want to do something, no one can stand in the way because it’s an authoritarian Leninist society, where there is no democratic process. It is rule by law (as defined by President Xi or the CCP), not rule of law.

“When they confront reality, they will have to look it in the eye.

“There seems to be almost universal revulsion at owning stocks in China for good reasons. Yet Chinese stocks today are the equivalent of the “anti-ESG portfolio” of 2021 and 2022.

“Every sector ignored by the market due to ESG compulsions roared back to life — and was in hindsight the only portfolio to own in 2021 and 2022.

“If you don’t own China today, you are going to miss out.”


About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at may 5, 2022, 2022.

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