At the start of Chinese New Year 2024, Chris Metcalfe, chief investment officer at UK asset manager IBOSS, part of wealth manager Kingswood Group, outlines its portfolio allocation to China as well as the opportunities and risks he sees for investors there.
As we enter the Year of the Dragon, specifically the Wood Dragon, Chris Metcalfe at IBOSS has highlighted this week how Chinese equity markets lagged global peers in 2023 and have had a difficult start to 2024. He has reduced Chinese holdings over the past 12 months, while gaining exposure into wider Asian and emerging market funds.
Tradition says that during the year of the Dragon, "you might need to brace yourself for various challenges and make more effort to achieve your goals," which could turn out to be accurate.
Metcalfe drew attention to how anticipation for a sustained recovery in China after removing pandemic-related restrictions proved short-lived, as pent-up demand could not offset property sector worries and softer consumer sentiment.
“Property stocks continue to act as a lead weight on investor sentiment, despite various measures to help boost the liquidity available to property developers. These moves should help ease the lingering cash crunch for Chinese developers who have been at the receiving end of Beijing's crackdown aimed at addressing the sector's bloated debt levels,” Metcalfe said in a note.
“Reserve ratio requirements (RRR) for banks have also been cut by 50 basis points from 5 February, providing 1 trillion Chinese renminbi ($0.14 trillion) in long-term capital. The People's Bank of China (PBOC) said there is room for further easing of the monetary policy, but markets now react more to action than words. The market sell-off is attractive, leaving stocks trading below longer-term average levels,” Metcalfe said.
Many multi-asset managers acknowledge that the Chinese equity market looks cheap, but opinions vary wildly regarding whether buy signals are flashing green for China.
Un-investable Chinese economy?
Given the actions of the communist government in the last few years, it is considered unreliable. Some American politicians have referred to it as un-investable, but much of the rhetoric is to score points with their electorate. Metcalfe cautions against writing China off, however, saying that the communist leadership know they must manage a thriving economy if they are going to retain the support of the Chinese people.
“It is widely considered that globalisation peaked somewhere around the start of the pandemic and, until then, countries and businesses were running 'just in time' supply chains. The pandemic brought home to companies just how fragile this working method was,” he said. Reshoring, sometimes called friendshoring, is now a strategy many companies have adopted, meaning they are looking to partner with companies in countries they consider more reliable. For the US market, for instance, this would mean a preference for countries such as Mexico or even Vietnam over China.
As we retreat from peak globalisation and enter a new era, Metcalfe thinks there will be many more examples of governments and companies engaging with new partners to strengthen their supply chains. “This will produce different winners and losers, but for now, it looks like China will likely continue losing out in some markets,” he said.
However, gross domestic product (GDP) in China grew 1 per cent in the fourth quarter of 2023 reaching 5.2 per cent from a year earlier. Over 2023, growth was also 5.2 per cent, above the government's 5 per cent target, which was expected to be missed only a few months ago. China is still the second biggest global economy, and while it has several complex economic issues, Metcalfe thinks it is undoubtedly not un-investable on purely economic grounds.
“Unfortunately, China finds its relative invisibility diametrically opposed to India,” he added. “Whilst world leaders are queuing up to sign high-profile deals with India and are happy to take the photo opportunity with Prime Minister Modi, nobody in the West wants to be associated with deals with China,” he continued.
There have also been ongoing rumblings of a potential Chinese invasion of Taiwan, and many column inches have been written on how this may have an even more significant negative impact on the country's relationship with the US, as well as the world at large.
Metcalfe highlighted how the market reaction to the Taiwan elections has been muted. If it weren't for the actual conflicts that have broken out in the last couple of years, a potential Chinese invasion would be grabbing more headlines. The situation will simmer indefinitely, but Metcalfe said China may need to consider another way to peacefully coexist with its neighbour, after military and economic coercion failed.
IBOSS portfolio positioning
Despite remaining reasonably positive for Chinese equities as a whole, Metcalfe has cut the firm’s explicit Chinese holdings over the last 12 months in favour of gaining exposure via Pan Asian and emerging market funds. He decided to make these moves because he thinks agility could be a key attribute in navigating the tricky waters that are investing in China.
See more commentary about China’s outlook and investment opportunities here.