China’s stimulus to spark a sustained stock revival?

The stimulus measures announced by the People’s Bank of China (PBoC), and more recently, the National Development and Reform Commission (NDRC) and Ministry of Finance (MoF), have been the main talking point in markets. The PBoC announced a raft of policy measures including rate cuts and other monetary tools to support capital markets. The subsequent Politburo meeting signalled policymakers’ willingness to accelerate necessary fiscal spending. With the aim of revitalising the economy, stabilising the property market as well as boosting consumption and employment.

We believe these measures represent a positive sign of Chinese leadership’s growing commitment to deal with deflation risks and address the ailing property market. These are key aspects to any recovery in consumer confidence and demand. Progress has been made on easing purchasing restrictions and programmes to address housing inventories.

While lacking specific numbers, the recent MoF briefing confirmed a commitment to incremental fiscal stimulus, with expanded government debt limits and local government debt resolution. We will be looking for more details coming out of the National People’s Congress (NPC) Standing Committee meeting and the Central Economic Work Conference later this year.

Turning the tide

While less extreme after the recent move, valuations in China remain compelling relative to history and global peers. We believe there is still ample room for valuation multiples to expand further. While the earnings outlook for China in aggregate is adequate in a global context, with strong results in areas like technology, the general trend of earnings revisions has been downward. The hope would be that these policies can help drive a turn in economic fundamentals, leading to an improved earnings outlook. Such a virtuous circle would almost certainly drive a sustained improvement in market sentiment and further re-rating.

On the ground, weakening consumption trends have been evident - reflected in weak consumer confidence data and rising savings rates. This can be seen in the levels of consumer deposits which have risen significantly since Covid times. The weak property market is a clear drag here, thus more concerted efforts to address this are an important step towards improved consumer confidence.

Recently announced regional coupon programmes and subsidies (in addition to trade in programmes already underway) are relatively small in scale - the hope is that we see more significant programmes to further support sentiment.

Focussing on winners

The weakness in consumption has been reflected in performance for many of the stocks, and this is where we have been allocating more capital. The traditionally defensive area of consumer staples was particularly sold off, creating opportunities in some very strong franchises spanning areas such as dairy, beer and condiments. Sell-offs in structural growth stories in the consumer discretionary space such as sportswear and household appliances also created opportunities, with both set to benefit from any improvement in consumer sentiment. Our significant positioning in other consumer focused segments should also benefit including travel, education, consumer finance and insurance.

For example, one of our holdings is in Tuhu, China’s leading auto maintenance company. As the largest player in a growing market, Tuhu stands to benefit from the increasing number of vehicles requiring maintenance, underpinned by China’s position as the world’s largest auto market. This investment aligns with our broader strategy of focusing on market leaders in sectors with strong structural growth drivers.

Another significant holding is Ping An Insurance, a company that offers compelling long-term value despite short-term pressures in the insurance market. Its focus on life insurance, a sector with low penetration in China compared to Western markets, positions it well for future growth. The company’s efforts to improve its agency force and its commitment to shareholder returns through dividends, underscore its attractiveness at a time when the stock is trading at a significant discount to book value.

Elsewhere, significant innovation continues apace across a range of sectors, reflecting companies’ commitment to building competitiveness and improving pricing power. Despite a relatively weak domestic environment, we are seeing companies remain committed to investing in research and development. Included here are areas like renewables, the electric vehicle value chain, automation and healthcare.

Within the trust, we are overweight industrials, consumer discretionary, consumer staples, healthcare, and technology sectors. While gearing levels remains remain relatively high versus history given the opportunity set we see, they have moved downward with some selective trading amidst the volatility and the recent expansion in the net asset value of the trust.

By focusing on sector winners with strong growth profiles and attractive valuations, we believe the trust is well-positioned to benefit from the recovery in China’s markets.