Investors Are Eyeing Chinese Markets As Pandemic Recovery Inspires Confidence
The US and China trade war is another challenge which has rocked the national economy, but the deal has just recently entered phase one.
Recent activity indicators show that China is beginning to return to normalcy, while the rest of the world’s economies are still grappling to recover and the turnaround has set it apart from the rest of the world.
And the outbreak there has failed deter foreign investors from targeting China as the country is rapidly growing and changing the financial status quo. For those investors, China remains an attractive investment opportunity. The Chinese business environment, including a growing ease of doing business, continues to improve rapidly.
And the proof is in the pudding – foreign companies extended their investments in China in the first quarter of 2020 despite the coronavirus pandemic.
Another reason why investors are targeting China is that it is the second-largest economy in the world. According to Minister Zhong, 320 projects had investments over $100 million per capita in the Chinese market.
“I don’t think smart foreign investors will give up on the Chinese market,” Zhong, Chinas minister of Commerce said, referring to the country’s enormous consumer capacity, an ever-perfect business environment, and the complete industrial chain that the government has.
Another reason why smart investors are targeting China in 2020 is that the region has a stabilized foreign trade such as export tax breaks, foreign trade credits, and export credit insurance with the assistance of its ministry of commerce to support foreign trade enterprises.
China has gone ahead of the world to explore emerging markets and deepening cooperation within the countries, especially the African region.
It is also encouraging companies to build networks and warehouses in their countries and even stimulating the development of new business models such as cross-border e-commerce.
China is already expanding its imports to meet growing domestic demand and boost confidence in world markets.
While other countries are primarily importing, China is doing all it can to boost the consumer market while steadily recovering from the coronavirus pandemic.
Retail sales of goods, an essential indicator of consumption growth, in the second quarter have fallen to 3.9 percent down, 15.1 percentage points from the initial decline it recorded in the first quarter of the year 2020.
China is also a great and attractive market for fixed income. Towards the last quarter of 2019, it became the second-largest bond market globally, thus showing robust and compelling growth.
Furthermore, over the next four to five years, local currency corporate debt will boost Chinese bonds. From a yield perspective, Chinese bonds outperform developed markets. The 10-year bond yield in China is around 3% – 3.2%.
This could be interpreted as a higher premium of risk in both local debt and currency. However, we would also see that higher yield as a pioneering premium, as many investors still have difficulty investing in Chinese local debt.
Also, unlike the major countries that have launched never-before-seen stimulus measures, China has been more cautious in launching actions gradually and steadily.
It still has several weapons to reinvigorate consumption in its economy. So far, most of China’s stimulus has focused on tax cuts, modest interest rate adjustments, liquidity for banks and financial markets, and some additional government spending.
The oil price continues to favor the Chinese economy; being a net importer of oil, current prices serve as a direct stimulus to consumers, the business community, and the central government.
Despite the recently signed OPEC + agreement, analysts do not believe in a price rally until demand picks up.
China Always Buys Oil When It’s Cheap to Fill Strategic Reserves.
At the valuation level, China’s multiples are currently relatively more attractive than the rest of the global markets: the CSI 300 has a price/earnings ratio (or Price to Earnings) of 13.7 versus 18 for the MSCI World and 19 for the S&P 500.
Another investment opportunity is the growth of Chinese urban middle-class consumption habits, which is rapidly becoming a goldmine to flourishing opportunities in; lifestyle, education, and healthcare sectors.
In other words, as first and second-tier cities become saturated, China’s emergent consumer class is expanding quickly in the country’s lower-tier cities.
Since earnings per share could be less reliable than usual when significant reductions in revenues are expected, it could be looked at from a price to book value perspective.
The CSI 300 would be at 1.71 times, the MSCI World at 2.16 times, and the S&P 500 at 3.16.
It is also worth highlighting another specificity of the Chinese market: the high participation of retail investors.
In the onshore market (A-shares), more than 80% of the volume comes from retail investors.
This dominance profoundly impacts market movements, reflecting investment philosophies (retailers are often more short-term in their investment horizons and tend to overreact to new information).
This rewards the institutional investor, typically more informed, creating opportunities.
A good understanding of the uniqueness and complexity of Chinese corporate culture is critical.
Highlighting the divergences in recent economic data between China and the rest of the world, the People’s Bank of China’s ability to provide additional stimulus still exists, and the advantages of a centralized economy give weight to those who are confident that Chinese stocks can continue.
It is a good performance vis-à-vis other emerging and developed markets.
Also, the more predictable long-term trends point to endless opportunities for foreign investors in China.
So for now, it seems investing in China in 2020 is a smart move because the country is set to compete with world powers, and dominate the world market.