Despite Beijing's series of surprise stimulus measures, fund managers remain cautious about Chinese equities, with most keeping their investment portfolios unchanged, according to a Morningstar report.
In a report released on Oct 8, Morningstar analysts Claire Liang, Sabrina Du and Sam Hui note that while China’s latest initiatives have been welcomed by market participants, fund managers have had varied perspectives, with some viewing this as a clear policy shift while others await future developments.
However, most fund managers have stayed true to their investment portfolios and have not yet acted on these changes, the Morningstar analysts state.
In late September, China launched a series of stimulus measures, including extensive interest rate cuts, reserve requirement ratios and mortgage rates, alongside the central government promising additional fiscal support to stabilise the property market.
This sent China equities on a “blistering rally”, the analysts highlight. The Morningstar China Target Market Exposure Index, which measures the performance of large and mid-cap Chinese companies listed in Hong Kong and the US, was up 17.29% (in US dollars) for the week of Sept 27, representing its largest weekly gain since 2009.
The Morningstar China A Target Market Exposure Index, which represents the performance of large and mid-cap Chinese companies listed on the Shanghai and Shenzhen stock exchanges, was also up 16.56% for the week of Sept 27. The Morningstar analysts note that this is its best weekly performance since its launch in June 2020.
See also: China’s stock rally faces risk as retail enthusiasm seen cooling
The Hong Kong stock market has also seen record daily transactions since the stimulus announcements, with the Hong Kong stock exchange turnover reaching HK$500 billion ($83.89 billion) on Sept 30, led by Chinese stocks. In contrast, the Morningstar analysts note that the average daily turnover for the first eight months of 2024 was a mere HK$106.8 billion.
On Sept 30, the combined turnover on the Shanghai and Shenzhen stock exchange grew to a record RMB 2.6 trillion ($480.13 billion), more than triple the daily average of RMB 793 billion, the Morningstar analysts add.
To this end, Morningstar director of equity research Asia Lorraine Tan says China markets are “no longer cheap” at the current juncture. She notes that over the past two weeks, Morningstar’s coverage universe has moved from a discount of 21% of its fair value estimate to just 4%.
See also: China keeps policy loan rate unchanged for second month
“Because China had been underweight by most, the impact of the buying has led to huge price moves given limited selling. At this stage we do believe some companies have more than factored in any potential positives. And if there is any disappointment or if good policy news tapers off, we think we could see some steep retracements,” she says in an Oct 8 commentary.
While Tan thinks there are still buying opportunities, Morningstar would be highly selective as the risk/reward ratio has risen. The firm sees attractive discounts in the consumer cyclical, consumer defensives and communication services sectors, preferring higher quality names with attractive upside such as internet giant Tencent, property developer CR Land and fast food operator Yum China.
More push needed in the long-term
FSSA China Growth’s portfolio manager Martin Lau saw the recent round of stimulus as a positive surprise, as it signals a serious intent to meet economic growth targets, with additional monetary easing announced and indications for more fiscal measures to come. He believes this should help encourage consumer spending while cushioning structurally weaker sectors like property.
That said, Lau remains steadfast in his investment discipline rather than constructing his portfolio based on sentiment changes or short-term macro trends. His long-term holdings include dairy producer China Mengniu Dairy and sports equipment company Anta Sports, despite the widespread weakness across consumer categories over the past two years. He continues to avoid most of the state-owned enterprises (SOEs) and cyclical companies with persistently low returns and weak pricing power.
Similarly, J.P. Morgan China’s portfolio managers Rebecca Jiang and Howard Wang also continue to avoid big SOEs. While the managers think the new policy package marks a clear shift from the previous supply-side recovery model to one that focuses on boosting consumer spending and stabilising the real estate sector, they have not made major portfolio changes, maintaining their bias towards technology, consumption, healthcare and new energy-related companies.
Schroder’s portfolio manager Louisa Lo acknowledges that markets have been “excited” by recent policy changes. That said, she recognises that the sustainability of market recovery depends on actual policy implementation and its impact on improving macro fundamentals. She believes that in the longer term, effective structural reform and economic restructuring is needed for China to bounce back from its prolonged weakness.
For more stories about where money flows, click here for Capital Section
Although Lo notes that the policy stimulus has helped improve the outlook for many of the portfolio holdings, she has not made significant portfolio changes.
Unlike the fund managers at FSSA, JP Morgan China and Schroders, Matthews China’s Andrew Mattock, Winnie Chwang and Sherwood Zhang are willing to deviate from the benchmark and load up on sectors where they see opportunities, including that in consumers, industrials, and real estate in recent years, Morningstar points out.
The fund managers were encouraged by the latest initiative that made central government-backed loans fully available for local entities to purchase unsold housing inventory, seeing it as a way to alleviate the oversupply problem. The team’s portfolio has had a persistent overweighting to the real estate sector, with a preference for real estate agent KE Holding, rather than the troubled property developers.
The managers at Matthews China also expect financials and consumer discretionary to be near-term beneficiaries, given the cut in reserve requirement ratio and mortgage rate, as well as the stock market-boosting measures. Overall, the team was comfortable with its existing portfolio positioning going into the stimulus push and remained watchful of its impact on reviving consumer demand.
