Value managers routinely enter markets that others shun, and now that makes China a natural destination.
Veteran bargain hunters acknowledge that China’s economic growth prospects are uncertain and that policymakers may continue to stumble. But Beijing will continue to try to stabilize the economy – enough to create a tactical opportunity in pockets of the market, they reckon.
Investors have fled China as national champions of internet giants after three years of strict Covid restrictions, misguided policy measures and a crackdown on the property market.
Alibaba Group Holding
(Symbol: BABA) It undermined confidence—among households, businesses, and investors.
As the US and China become increasingly tense, many money managers have stepped up their stakes in China, leaving former Chinese funds in China for modern clients.
But for some new market veterans who know how to navigate policymakers’ missteps in emerging markets, cheap valuations in parts of China’s stock market are intriguing. Arjun Divicha, founder of GMO Emerging Markets Equity, remains cautious about China but is not worried about the country’s slow recovery from Covid.
“That normalization of demand will happen, and if you look at auto sales, there’s some evidence that it’s starting to happen,” he says. “The government has delayed reforming the economy for good reasons. [due to its debt concerns] But I think they will succeed in the end.
BCA research analysts hinted at stability in the economy in August as China’s credit growth improved and price pressures eased earlier in the summer, with consumer prices rising 0.1% from a year earlier, better than a 0.3% decline in July.
BCA analysts are looking for more proactive policy measures that will produce a significant economic recovery before becoming complacent and reconsidering the weighting they have given to Chinese assets as clients.
But Louis Lau, director of investment at Brandes Investment Partners, says so Baron In an email, he said he sees many possible ways to improve investor sentiment and is looking for opportunities in Internet stocks, life insurers, sportswear makers and solar supply chains.
For Henri Mallary-Deoria, Ariel’s chief investment officer for global and emerging markets equities, the focus is on consumer-focused companies that he thinks will show the fastest growth in the coming years, in part because of Beijing’s efforts to restore confidence among households.
Mallory-d’Oria said gradual efforts by policymakers in recent weeks have seen some signs of stabilization in asset prices, laying the groundwork for a recovery in consumer sentiment. Two quarters of more stable property prices, as well as income growth and strong car sales are improving consumer confidence.
This kind of improvement helps the likes
Ali Baba
,
Mallory-D’Oria thinks he can win in many ways. “There is a cyclical recovery, but the company is restructuring itself,” he says.
The decision by former Alibaba CEO Daniel Zhang to step down two months after he began a task to focus on the company’s AliCloud division casts a short-term cloud over the stock, which fell more than 4% on the news. The company said Zhang left to run a new technology fund, which AliGroup is expected to invest an initial $1 billion in.
So far, Mallari-Deoria doesn’t see the growth changing the outlook for profit growth for Alibaba’s core business, or changing the timetable for the division’s turnaround.
A spinoff would help valuations, but a near-term boost could come amid signs that consumer spending is picking up. Recent cost cutting at the company should also help. Although Mallari-D’Oria doesn’t expect valuations to return to pre-recession levels, he says investors could do well even if the stock rises from nine times its current low to 11 or 12 times earnings.
If consumers feel better about their prospects as Beijing offers more stimulus, Mallory-D’Oria says automakers will.
The Great Wall Engine
(1210: Taiwan) can be used. Better auto sales will help, but the company also has a new sport utility vehicle that will allow it to take a higher profit per unit than in the past, which should boost margins, he said.
Although China is growing at a much slower pace of 3 to 5 percent, DVICA expects stronger growth in areas where Beijing is focused, such as technology and businesses related to the green transition, as geopolitical tensions with the U.S. intensify. U.S. sanctions that limit China’s access to critical technologies are prompting Beijing to invest in electric vehicles, semiconductor chips and computers to make it less dependent on the rest of the world.
“It’s not that growth has fallen off a cliff and stayed at zero forever, or that something has fundamentally changed,” he said, referring to a long-term headwind of population decline and the country’s debt burden. “When things go from bad to bad, from good to great, you make more money.”
So far, that message has yet to be communicated to the market.
iShares MSCI China
Exchange Traded Fund (MCHI), is down 5% so far this year. But that creates a fertile market for patient bargain hunters looking for immediate stability in the world’s second-largest economy.
Write to Reshma Kapadia at [email protected]
