China’s stock market surge – can it continue?

The turnaround in both the Hang Seng Index and China’s blue-chip CSI 300 over the past week has been dramatic. Year-to-date falls have been transformed into strong year-to-date gains in the space of just a few days. The CSI 300 is already significantly above the levels it temporarily reached in May, just after the introduction of more tentative steps to boost the stock market.

What’s happened so far?

China’s CSI 300 Index has added around 25% over the past week, easily its largest weekly gain since the Global Financial Crisis in 2008¹. Coordinated efforts to bring stability to China’s property market and provide a boost for the economy were behind this move.

Up to now, China’s all-important consumer economy has been struggling to maintain an upwards trajectory, amid low confidence, falling real estate prices and liquidity issues affecting some of the country’s largest developers.

• Tom Stevenson: The real lesson we should learn from the unexpected China rally

Economic growth slowed to 4.7% in the second quarter compared with 5.3% in the first three months of the year. This is little more than half China’s growth rate of approximately 9% since the 1970s². The latest data from Caixin Global showed manufacturing activity decreased at its fastest pace in 14 months in September³.

Some sort of intervention to help the economy or stock market or both had been anticipated for some time. Even so, the timing and extent of the measures announced last week surprised to the upside.

Among the measures announced was a reduction in the required reserve ratio (RRR) for major banks from 10% to 9.5%. This frees up more cash for banks to drive growth in the economy. There were also cuts to very short term interest rates and the rates charged on existing mortgages.

Moreover, additional liquidity measures were announced, including loan facilities to fund share buybacks and a programme to make it easier for funds, insurers and brokers to buy shares.

Where next for the stock market?

Some of the policy changes already announced will take time to feed through to the underlying economy as well as the stock market, so they might be expected to act as a support for shares over the weeks and months ahead. The authorities have demonstrated a resolve to lift growth and that, in itself, should boost confidence in the economy and stock market.

Even so, much of the bull case for shares from here could rest on China building on these latest measures as well as the emergence of clear signs the economy has bottomed. The focus now turns to the possibility that there could be additional monetary stimulus, for example, in the form of further reductions in the RRR or mortgage rates or even additional government spending that feeds directly into the economy.

Is China still undervalued?

While recent market gains have been considerable, China’s stock markets still look inexpensive compared to the amounts companies are earning. Shares have broadly moved from being extremely cheap to less cheap.

At the end of August, the MSCI China Index traded on just 8.9 times forward earnings compared with 17.7 times for world markets⁴. Market gains of around 25% since then imply that this rating may have increased to about 11 times, which is still low.

Further progress towards more normal valuations now rests on what further stimulus China’s authorities can implement and how well that feeds through to domestic consumers.

Lesser, though still important factors include growth in the demand for Chinese products throughout the rest of the world and how easy it is for China to do business with the United States after November’s US presidential election. Longer term, it is vital that confidence in China’s economy and stock market is restored, both at home and internationally.

China’s Golden Week runs from today until next Monday 7 October, during which time China’s stock markets will be closed. Given the events of the past week, it’s hard to say at what levels the markets will reopen. As ever, individual emerging markets can be highly volatile over short periods and they demand closer monitoring than mature markets. For now though, momentum is surely on the side of Chinese shares.         

Fund ideas

Fidelity China Special Situations PLC is the UK’s largest China-focused investment trust. Since its launch in 2010 the trust has offered direct exposure to China’s growth story. Portfolio manager, Dale Nicholls, tends to find more opportunities among small and medium-sized companies, where fewer investors leave greater scope for mispricing.

In an interview with Fidelity’s Tom Stevenson in May, Dale reported that clear winners were emerging and that some Chinese companies are delivering better shareholder returns in terms of buybacks and dividends.

Alternatively, Fidelity’s Select 50 list include a number of pan-Asia and global emerging markets funds. These can provide a widespread exposure unobtainable from a single country fund and dynamically adjust their weightings to their target markets as conditions change. 

Around 37% of the Lazard Emerging Markets Fund is currently invested in China, Hong Kong and Taiwan area. This makes sense, given the fund’s strong bias towards value oriented investments⁵.

The entire fund traded on just 8.3 times forward earnings compared with around 12 times for emerging markets generally at the end of August. Current large holdings include Taiwan Semiconductor, China Construction Bank and Lenovo.

Fidelity’s experts like this fund for the investment team’s long experience in value investing – often buying companies with depressed share prices. The manager of this fund is also exceptionally experienced and focused exclusively on managing emerging market equity funds.

Another Select 50 fund with a substantial exposure to China is Schroder Oriental Income Fund – an investment trust traded in London under the ticker SOI. It is suited to an investor seeking a combination of growth and income.

At the end of August, the trust had a 43.3% exposure to companies in the Greater China area and a yield of around 4.4%⁶. Please note this yield is not guaranteed. Large holdings include Taiwan Semiconductor, Oversea-Chinese Banking, BOC Hong Kong and Hon Hai Precision Industry.

Fidelity’s experts like this trust because it is run by an Asia expert who has specialist expertise in finding higher quality dividend payers. He is backed up by an experienced and large group of company analysts, many of whom are based in the region.

More on the  Select 50

Source:

¹ Bloomberg, 30.09.24
² National Bureau of Statistics of China, 15.07.24, and World Bank, April 2024
³ Caixin Global, 30.09.24
⁴ MSCI, 30.08.24
⁵ Lazard Asset Management, 30.08.24
⁶ Schroders, 30.08.24

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Shares in Fidelity China Special Situations PLC and Schroder Oriental Income Fund are listed on the London Stock Exchange and their price is affected by supply and demand. The trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.