‘It is the time for Chinese stocks to shine’: Outlook 2023

We have seen one positive surprise after another from Beijing; the easing of COVID restrictions has been faster than expected, there has been a rescue package for the property market and a positive move in terms of the relationship between China and the United States – by Dato’ Seri CHEAH Cheng Hye

 
China has started a new cycle of growth and recovery; at the party congress, it was confirmed that economic growth is now China’s number one priority as the main solution for many of the challenges it faces.

In panic buying from late October, many Chinese stocks went up by 20% or more; my analysis is that there is potential for the Chinese stock market to increase by another 20% to 40% in this new cycle. However, I must caution that markets almost never go up or down in a straight line. There may still be some turbulence, but the direction looks very positive indeed.

The key factors that determine market direction are traditionally the direction of the economy – whether corporate earnings and dividends go up and down – the direction of interest rates which determine the price of money, and investment sentiment.

A new factor will be geopolitics, which can now have a direct and immediate impact on market direction. For China, all the above factors moved negatively between March 2021 and 2021, but have now turned around; for the coming year, China is showing solid growth.

Most forecasts for Chinese growth in 2023, including that from the IMF, is for growth of between 4.5% to 5.1%. In comparison, much of the developed world has entered a slowdown and potential recession.
 

‘There is potential for the Chinese stock market to increase by another 20% to 40% in this new cycle’

 
China is able to turn around partly because inflationary pressures are low, so there is room for stimulus, even perhaps for moderate easing of interest rates, and the government’s property rescue package assures a soft landing for the troubled sector.

Geopolitical tensions have reduced since the recent meeting between President Biden and President Xi in Bali, when the US said it is not seeking confrontation with China. However, Chinese stocks

remain at rock bottom valuations last seen during the Global Financial Crisis of 2008, which is why people such as me who have followed China since the 1980s are pretty optimistic.

To put China into context for the global investor, we knew a world where the US dominated and provided a sense of security and safety; as investors, we focused on business and commerce, and let political leaders and military generals take care of the geopolitics.

But now, global order has broken down. We have been swept by social unrest, financialization, inflation and war; even climate change. We’re seeing the weaponization of trade, money, food, and even human talent. The prevailing investment approach of the last 25 years, FOMO (Fear of Missing Out) doesn’t really work anymore.

FOMO almost guarantees investors will be ‘whipsawed’, because markets become so volatile and unpredictable, and central banks ‘put’ – meaning expectation of them coming to the rescue of markets at each and every crisis – frankly, central banks have run out of room to implement such rescue packages, with the exception of a few countries such as China.

We have enjoyed too long a period of easy, almost free money, negative interest rates. The amount of money printed since 1996 is several times the size of the real economy; a very fragile situation of over-financialization and rising inflation.

How do global investors survive the challenging environment? I argue you survive by identifying long-term durable themes that allow you to ride out the roller coaster swings to the market, where almost every prediction can be proven right or wrong. You want solid investment themes, which allow you to hold your conviction, preserve your wealth, and pass it from one generation to another. You must figure out your preferred theme, and avoid buying high and selling low.

Themes include energy, food, key commodities, including copper and lithium, and defence stocks in an increasingly uncertain world. One of my favourites is Chinese stocks and bonds as it has become too big to ignore; I believe the key to sustainable investing, is to find a sustainable society that can withstand this era of social, monetary and financial disorder.

China has a foundation of sustainability and a large and fast growing middle class of 400m people – larger than the population of the US. It is likely to number 800m by the end of the decade – a very solid foundation of an inclusive society, which allows the country to provide its own huge domestic market for innovation, manufacturing, and distribution. It is a self-contained continental economy providing a high chance of sustainability which, in my view, is key to wealth preservation.
 

‘There are very significant changes in terms of how people save and invest, creating the world’s largest pool of savings’

 
There are very significant changes in terms of how people save and invest, creating the world’s largest pool of savings. The Chinese 25 year addiction to buying property faded away since COVID; household wealth used to be more than 50% represented by just this one asset class, whereas real estate today is more like 37%. Meantime, the percentage of household assets allocated to capital market products, to professionally managed funds, has risen to 13% from just above zero a generation ago.

The Chinese have discovered the value of investing in capital markets, relocating savings from a property market that had become an unproductive bubble. 80% of households in the cities already own one or more properties, so, China wants to redirect savings to productive investments, especially innovation, green energy, and manufacturing, and it is happening.

We are excited because it means there is a lot of new money from the Chinese mainland waiting to enter the stock market and support share prices and valuations; at the same time, there’s a supply of new ideas and new initiatives.

Chinese companies are choosing to IPO in Shanghai, Shenzhen and Beijing – the mainland domestic markets – which assures a lot of new opportunities for a public investing their savings.

So overall, we are quite confident to say that a new cycle has started in terms of the economic cycle, structural changes, valuations, sentiment and the overall global economy. I think China is entering a new era; it is the turn of Chinese stocks to shine.
 
Dato’ Seri CHEAH Cheng Hye is Co-Chairman and Co-Chief Investment Officer at Value Partners Group.

See Value Partners Market Outlook 2023