Expert investor Q&A: Why it’s time to hold the line on Chinese stocks
In this Q&A, Sunny Bangia, an Australian-based portfolio manager for leading asset manager, Antipodes, discusses why he thinks it’s important to remain invested in China, despite the prolonged period of volatility.
Q. The Chinese economy has been weak due to tight policy, regulation, reform of the property sector, geopolitical tensions, and more recently, lockdowns following a worrying increase in COVID-19 infection rates. Should you avoid investing in China right now?
A. It certainly feels that way. But I think if you take a more medium, longer term approach, the opportunities in China haven’t changed. They’re still very much the same opportunity sets that have always existed.
There is a trade up occurring in the consumer. There are interesting things happening in terms of decarbonisation, the industrial part of China, and just generally we feel very positive on many of those developments.
However, in the short term, policy is tight and now it looks to be moving the other way. The Government has been reforming the technology sector, something that’s going to happen to most technology businesses around the world. It just in the Chinese fashion happened quickly, swiftly, and now we’ll move on.
And there’s also a concern around the property sector where the Government is squeezing out the over-indebted developers and consolidating the sector into the quality property developers.
And finally, we do have a surge in infections, COVID-19 infections. So we’ve seen this before where the initial phase is difficult for that economy.
And as we kind of see a peak in those infections, we just start seeing a light at the end of the tunnel.
So, right now the tunnel does look quite dark. But that doesn’t take into consideration that the long term opportunities still remain.
And we are seeing evidence of Government now acting to address some of these issues.
Q. In recent months, there seems to be a real change in rhetoric and policy from the top echelon of Chinese Government. Can you take us through what you’re seeing?
The Government has been looking to ease monetary policy since the start of this year.
More recently, Vice Premier Liu He has talked about more direct action in terms of supporting the real economy, discussions about managing the property developer risk and creating financial stability in the property market and to arrest some of the declines we’ve seen there.
We’ve seen mortgage rates fall across the nation. And also we are seeing now commentary about the regulation of the internet platforms coming to a conclusion, where there will be more of a green light, red light approach… You know, what can you do, can not do? This will be a healthy development for the platform economy.
We’ve also had the Chinese Securities Regulatory Commission modify the rules in terms of offshore listings (US-listed Chinese ADRs) sharing financial records. So this paves the way for Chinese ADRs to keep their US listings.
So, it’s a willingness from the Government to balance the national security issues with the needs of business. We’ll have to see the US side of things, but we’re seeing more of a collaborative approach, notwithstanding, many of these companies have a path back home to China via Hong Kong listing, which we’ve already seen.
Finally, we have the 20th Party Congress Elections at the end of this year where the current administration will be re-elected. The Party has an incentive to boost economic activity and we have seen that through tax cuts in the small to medium enterprise segment.
There are measures coming such as triple-R rate cuts and further interest rate cuts along with other measures to support household sector.
As the Government’s looking to now stabilise the economy and gearing up for an upswing.
Q. We’ve seen a meaningful sell off in Chinese equities so how are you thinking about valuations and the extent to which the market is already pricing in uncertainty? And perhaps you can touch on how this is broadly influencing the exposure to China in the global portfolios?
A. Our global portfolios have just north of 10 percent in Chinese equities. There has been a big de-rating on Chinese stocks and there’s been a large repricing of equity risk premia in China.
So, we do see that the current valuations are not factoring in much potential upside for policy change or economic stabilisation which we are seeing evidence of.
Some of our holdings are now trading at 50 percent of the valuation levels they were trading only 12 months ago. So there’s been a big repricing and they look mispriced we think on a medium term view, notwithstanding that they’re going through a COVID infection cycle.
So we have to manage out of that but it doesn’t take away from what we’ve discussed earlier that we still see a good opportunity on the medium term for many of these Chinese businesses.
Over the last few months we have trimmed some of our exposure on the Internet platforms and we’ve increased exposure on some of the domestic cyclical businesses in China which will participate in an economic rebound, namely in travel and property related exposures.