The Chinese stockmarket went through a turbulent first quarter of the year with the CSI 300 Index and MSCI China Index declining 13.4% and 4.8% respectively. While it is certain that China’s economy will continue to face headwinds – debt overhang, overcapacity issues and the repositioning of growth away from export and investment – the possibility of a hard landing remains remote.
Signs of stabilization
The latest macro readings suggest that the economy is stabilizing: the Caixin purchasing managers’ index (“PMI”) showed encouraging signs in March. The service PMI and manufacturing PMI climbed to 52.2 and 49.7 during the month from 51.2 and 48.0 respectively in February, indicating broad-based improvements in China’s economy. Meanwhile, the growth of China’s foreign reserves beat market expectation by expanding USD10.26 billion in March after four months of decline, posing some signs for easing pressures on capital outflow.
On the policy front, in the annual meeting of the National People’s Congress, the government has announced a growth target of 6.5% to 7% for 2016. To attain the target, a bigger fiscal deficit of 3% of GDP is expected down the road while monetary policies will likely remain accommodative in the medium term. With ample tools in its policy arsenal, we believe China will be able to combat the negative repercussions of reform and mitigate the impact of capacity closures. Perhaps the Chinese economy is analogous to a tightrope walker – walking on a thin line, but with a strong safety net underneath.
Value investment – winning the long-distance race
The volatile market in the first quarter put investors’ psychology to the test, even more so for value investors whose success relies heavily on prices converging with long-term fundamentals. For any value-investing veteran, learning to stomach temporary setbacks is part of the investment process. As the market goes through wild swings, prices may derail from fundamentals from time to time. This is why we think it is important to maintain a medium- to long-term investment perspective in the proven belief that in the long run, the promising returns of value-investing will pay for the short-term losses.
Window of opportunities in Chinese equities
Extreme pessimism clouded the market throughout the quarter, driving down share prices to crisis level. The valuations of Chinese stocks listed in offshore markets returned to a compelling level, H shares in particular which are trading at 10.3 times estimated 2016 price-to-earnings ratio. The cheap valuation, coupled with a 38% valuation discount against their peers in the A-share market, revived buying interest in H shares across the border. Chinese investors have poured USD6.8 billion into the Hong Kong stockmarket from late-October 2015 through early April 20161.
On the other hand, the bearish sentiment in the A-share market prompted some onshore mutual funds to raise their cash level to over 80%. As a contrarian investor, we see the market pessimism as a window of opportunity to add selective quality names in the A-share space.
13 April 2016
Ă‚
1. Data compiled by Bloomberg tracking investments via the Shanghai-Hong Kong Stock Connect scheme.
The views expressed are the views of Value Partners (Trades, Portfolio) Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investors should note that investment involves risk. This commentary has not been reviewed by the Securities and Futures Commission. Issuer: Value Partners (Trades, Portfolio) Limited.
