China’s latest stimulus package could be a turning point for wary investors, according to Coronation Fund Managers joint head of global emerging markets research Suhail Suleman.
While China’s economic challenges were serious, Suleman argued in a recent report that new policy measures and financial incentives may unlock valuable long-term investment opportunities in the country.
The stimulus package represents more than a potential escape from China’s cycle of economic pessimism and could reveal hidden potential within China’s markets, said Suleman.
He said careful stock selection in China could yield notable returns over time. As a comparison, he pointed out that while SA had faced 15 years of economic stagnation, currency depreciation and GDP contraction select businesses had delivered strong returns for investors.
Companies such as Clicks, Mr Price, Bidvest, AVI, FirstRand and AdvTech had delivered annual returns of 10.4%-17.2% over the past 15 years, which equated to cumulative returns of 440%-1,077%, he said.
For Coronation’s portfolio, Suleman estimated a 70% upside in Chinese holdings, significantly outpacing the 45% weighted average upside in the rest of the portfolio.
China’s ascent over the past 35 years had transformed the global economy. However, Suleman said, in recent years this growth had slowed due to tension with the US, weakening domestic demand and creating an oversupply of properties.
“It was the last major economy to lift Covid-19 restrictions, and the subsequent economic recovery has been brief. Decades of overinvestment in the property market have resulted in an oversupply of properties (both finished and unfinished), causing real estate prices to decline for several quarters,” he said.
Suleman said China’s property issues had affected citizens’ wealth and confidence, while a low birth rate was creating demographic challenges akin to those in other East Asian economies.
He said, however, unlike its peers, “China has not yet attained its goal of becoming a high-income country”. This “growing old before getting rich” dilemma had compounded investor scepticism, resulting in a cycle of share price declines and further sell-offs.
“Since residential properties represent the largest source of wealth for Chinese citizens, economic sentiment has inevitably suffered when prices have fallen, especially as the values of outstanding mortgages have not decreased with property prices.”
These factors had driven a steep sell-off in Chinese stocks, with the MSCI China Index down sharply from its 2021 peak, he said.
China’s recent stimulus package aims to counter these headwinds with targeted measures to support the property market, boost consumer spending and attract foreign investment.
Key real estate initiatives include lower lending rates and relaxed deposit requirements to stabilise property values. For consumers, government support focuses on boosting income for low- and middle-income workers, encouraging spending and strengthening economic sentiment.
Suleman viewed the stimulus as an opportunity for China to break away from the “cycle of negativity” surrounding its economy. While these measures could help, he said, they may not fully resolve its deep-rooted issues.
“While stimulus can provide short-term relief, it rarely addresses long-term structural challenges.”
Though Chinese markets have rallied since the announcement, Suleman believed there was still room for further rerating. He said China had historically underperformed the US and global indices, and current valuations were relatively low by historical standards.
The market’s price-to-earnings ratio, he said, hovers at about 13 times — much lower than the US (S&P 500) and India, which had recently attracted capital flows away from China.
Despite these hurdles, Suleman saw compelling prospects in China’s technology and consumer sectors, where companies were trading at a discount compared to their US and Indian peers.
Companies such as JD.com and Pinduoduo, which together controlled about 40% of China’s online retail market, were particularly appealing given their strong earnings growth and market positions, he said.
“Over time, we expect the multiple and hence valuation of the Chinese market to rise, as higher-quality businesses with more durable moats gain prominence in the index,” he said.
“While there are undeniable risks to investing in China, we believe that through careful stock selection, our China exposure will generate significant returns for our clients over time.”
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