Opportunities abound in China’s stock markets, the world’s second biggest, where valuations are attractive after a long period of underperformance, a senior official at Zurich-based EFG Asset Management said after his fund raised its exposure to Chinese shares.
In recent weeks, China has issued an unprecedented set of policy guidelines to push for transparency, security, risk-management and vibrancy in the country’s US$9 trillion stock market, as Beijing works towards its goal of becoming a financial superpower.
“The worst seems over for China, and a lot of negative news has already been priced in. One of the constraints on the Chinese market is the property sector, but that risk is well recognised,” deputy CIO and global head of research Daniel Murray said in an exclusive interview with the Post.
“The regulator is trying to encourage greater connect flows, which is helpful. The change is symbolic but it has been enough to change market sentiment from very negative to positive,” Murray said.
The China Securities Regulatory Commission (CSRC), the country’s securities watchdog, unveiled five measures to help halt a market slump and revive confidence in the nation’s capital markets.
Among the measures, the CSRC would facilitate listings in Hong Kong by the mainland’s industry-leading companies and expand the Stock Connect cross-border investment scheme by allowing more ETFs and adding in Real Estate Investment Trusts (REITs) and yuan shares listed in Hong Kong.
The CSRC measures have helped benchmark Hang Seng Index rise almost 8 per cent over the past month, beating all other major equity gauges in the world. At one point, it rose 20 per cent from a January low, a gain defined as a bull market.
EFG has increased its investment in Asian stocks excluding Japan, with Chinese equities making up “a large proportion” of the index, Murray said.
The firm manages about US$26 billion on behalf of clients as of January 2023.
In its portfolio, it has a weighting of 11 per cent to Asia ex Japan versus 10 per cent in the benchmark. Within that, it has a weighting of 38 per cent to China versus 35 per cent in the benchmark, while its weighting in Japan is 4 per cent, versus 5 per cent in the benchmark.
“There are a lot of opportunities in Chinese equities, primarily because they are cheap and because they have underperformed for so long. While cheap stocks can always get cheaper, Chinese stocks are reasonably attractive in the current context.”
The recent measures unveiled by the market regulator will encourage more capital flow, he said.
EFG is not alone in striking a bullish tone on Chinese stocks.
In April, UBS Group, Switzerland’s largest bank, upgraded the ratings for both Hong Kong and Chinese stocks to overweight, citing resilient earnings by big companies, while HSBC Holdings said in a separate report in the same month that Asian funds had boosted holdings of Chinese stocks to a seven-month high.
Outside China, he believes other Asian markets, excluding Japan, were also attractive and that it was time to book profits in other markets which have outperformed.
“The Japanese market has been phenomenally strong, but the trend is looking a little bit tired. So it has made sense to take some profits,” he said.
“The rest of Asia has underperformed, so the markets are relatively attractive from a valuation perspective. In addition, many Asian economies and markets benefit from the China-plus-one policy that many companies have been implementing in recent years,” he said.
The China plus one policy refers to many companies keeping their production capacity in mainland China but diversifying their production lines in other Asian markets.
“The growth situation in many parts of Asia is looking reasonable this year, supported by domestic consumption.”
Murray said his company also takes into account the ESG (environmental, social and governance) factor in its investment strategies, and that it would not invest in companies with poor environmental track records or weak corporate governance, as these companies may face potential future liabilities.
Murray believes US rate cuts may not materialise soon while Europe will cut interest rates faster in comparison.
“The European economy has been very sluggish, while the expectations around the US economy are getting stronger and stronger,” he said.
“US inflation is above target and is not coming down very quickly. The labour market is still very tight and the economy is still expanding robustly. There is therefore no reason for the Fed to be in a hurry to cut rates,” Murray said.