"As the year-on-year economic data starts to factor in last year’s weak fourth quarter, like-for-like macroeconomic comparisons should become stronger into the end of this year.”
This would disrupt the now commonplace view that China is destined for structural stagflation.
There is also the question of whether Chinese markets are now just too cheap to ignore. The average fund in the Investment Association China/Greater China fund has dropped 20.7 per cent for the year to date, having dropped 16 per cent in 2022 and 10.7 per cent in 2021, data from FE Analytics states.
Admittedly, prices had probably got ahead of themselves prior to that point, but the MSCI China A Index now trades on a forward price-to-earnings ratio of 11.2x, compared with 16x for the MSCI ACWI.
It could, of course, get cheaper, but investment managers report signs of capitulation in the market. Companies that give mildly negative guidance have seen their share prices slump as investors throw in the towel, while good news is greeted with indifference.
Many international investors have turned their attention wholesale to India, which has a more appealing growth trajectory, but where stock markets are significantly more expensive.
Fertile source of innovation
Investment managers report that operationally, many Chinese companies are doing well, and it remains a fertile source of innovation in areas such as green energy and digitisation.
Martin Lau, manager of the FSSA All China fund, says he continues to focus on earnings and management rather than relying on economic growth, but also that the economy’s short-term challenges have not disrupted long-term trends, such as rising middle-class consumption and adoption of automation.
It is worth noting that there are still some fund managers who will not touch China.
Jason Pidcock, manager of the Jupiter Asian Income fund, has been an outspoken bear on Chinese markets, deterred by the levels of debt, problems in the property market, demographics, the national politics and its geopolitical position.
His view is that there are other countries in the region where the risks are lower, where governments have a greater level of legitimacy and the rule of law is stronger.
There are also demographic headwinds for the country. The World Health Organisation now predicts that the population of over-60s will reach 28 per cent by 2040.
That is a worse profile than that of the UK and is consistent with a mature, low-growth economy rather than an ambitious, fast-growing emerging market.
There are still plenty of reasons not to invest in China.
However, bull markets seldom start when the environment looks rosy. Chinese markets have had a long run of weakness and there are a number of catalysts that could get investors interested again in the year ahead.
