21 Feb 2024

Fidelity: Understanding China's recent volatility

China’s equity markets have declined further over recent weeks off the back of weak data and a subdued response from policymakers. Marty Dropkin, Head of Equities - Asia Pacific, considers recent moves in the context of China’s broader economic objectives and outlines where our local team are identifying pockets of resilience and innovation, which could reward investors willing to take a long-term view.


Key points

  • Chinese policymakers’ reluctance to inject additional stimulus amid concerning economic data has driven a sell-off in China’s equity markets.
  • Amid alarming headlines, we still believe long-term opportunities lie in the resilience and adaptability of Chinese companies - and can be identified by focusing on discerning fundamentals.
  • It pays to be selective, but current valuations look compelling and corporate China has proven time and again its ability to innovate and create opportunities.

It’s been a weak start to the year for China and Hong Kong stocks, with both the CSI 300 and the Hang Seng Index declining sharply in January. This is after the People’s Bank of China’s decision to maintain current prime loan rates, indicating a reluctance to inject additional stimulus into the economy amid further concerning economic data.

The fast-paced sell-off has led to a sense of panic, prompting investors to rush into selling more to maintain their underweight position in China and adhere to volatility controls, further undermining confidence.

A slow and steady policy response

Considering the broader context is crucial. China's economic cycle diverges from the West, where inflation concerns lead central banks to maintain high interest rates constraining growth momentum. In contrast, the Chinese government is slowly but surely stimulating investment and consumption to achieve stable GDP growth of around 5 per cent.

Today, there are discussions over a stabilisation fund for stocks, but the significant stimulus of the past is unlikely since it would undermine the government’s long-term economic objectives. But despite ongoing economic challenges, targeted support for the property market and a shift in policy orientation more towards growth, sets the stage for potential recovery.

Moreover, the substantial amount of household savings, accumulated for security during these uncertain times, creates the potential for an upswing in consumer spending once confidence is restored.

Compelling valuations, but it pays to be selective

While it’s too early to declare an end to this period of elevated volatility, amid the alarming headlines, opportunities for long-term investors lie in the resilience and adaptability of Chinese companies and can be identified by focusing on discerning corporate fundamentals.

Chinese companies’ commitment to innovation and high-end manufacturing is evident in measures of research and development spend, or their share of global patent applications. Good quality companies are expected to profit from gaining market share in fragmented industries like building materials, which are poised for further consolidation. Urbanisation and a growing middle class persist in strengthening consumer purchasing power, offering structural growth for those under-penetrated products and services industries.

Healthcare also presents opportunities, especially in areas with low penetration like medical devices or core pharmaceuticals. In emerging sectors, opportunities can be found in the electric vehicle (EV) value chain, particularly those providing key components and services, such as battery manufacturers or auto parts suppliers. Many businesses are also benefitting from the re-orientation of global supply chains and an increasing focus on self-sufficiency and local suppliers.

Investors can now buy into these opportunities at what we believe to be compelling valuations. A wide range of measures look favourable, for example the one-year forward price-to-earnings (PE) ratio for MSCI China is 9 times versus it’s 10-year average of 11.4 times - not far from its lowest level in the past 20 years.

But as always with investing in China, it pays to be selective. Our confidence in these appealing valuations is anchored in on-the-ground research, which is currently uncovering resilience among many companies, and the belief that stock prices follow earnings in the long-term.

Current market moves may be unsettling even for experienced investors, but corporate China has proven time and again its ability to innovate and create opportunities even in the toughest of markets.


Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets.


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