4th October 2024
It’s been a remarkable period leading into the National Day Golden Week celebrations in China.
Chinese equities have been amongst the most hated in the world in recent years, leading to the usual lazy arguments of ‘China is uninvestable’ surfacing again. Those three words are typically put together anytime Chinese equities underperform for a while, or the authorities target a very specific area to make an example. They are also normally music to our ears, for they tend to come before sharp rallies in Chinese equities.
Starting with China being uninvestable, we accept it has been a challenging market in recent years to make stellar returns, but we have always believed it is a great market for active managers. The world’s second largest economy, with thousands of listed companies, poor analyst coverage and often the potential to invest alongside well flagged government policies to generate outsized returns is always going to throw up some great investment opportunities.
A few years ago we came across one of the very best active managers of Asian equities with a portfolio that typically has 40-50% exposure to Chinese/Hong Kong listed stocks – CIM Dividend Income. From a regional allocation perspective, our decision to introduce the fund in February 2021 has been appalling – since then MSCI China is -34% and MSCI Hong Kong -11% in sterling terms (10/02/2021 to 02/10/2024). However, CIM has returned +50% total returns and almost exactly matched the return of the MSCI North America’s +54%. We’re glad we don’t invest on lazy narratives.
In the past two weeks, the People’s Bank of China (Chinese central bank) unleashed the biggest stimulus package since the start of the COVID pandemic in a bid to boost economic growth, and the government announced a wave of fiscal initiatives alongside an explicit focus on promoting a ‘moderate rebound in stock prices’. Actions have included cutting key policy rates, injecting capital into banks, providing capital lines to companies to fund share buybacks, and reducing interest rates on existing mortgages and downpayment requirements on second homes. It is clear that Beijing cares about the equity market and is not going to let it languish on close to all time low P/E ratios.
Though the degree of the action so far is not on a par with previous bazooka monetary and fiscal stimulus efforts from Chinese authorities, the stock market reaction has been very significant and the specific references to the stock market by the government are important. Since the 19th September, the MSCI China index is up a whopping 31%, and the MSCI Hong Kong index is up 20% in sterling terms (19/09/2024 to 02/10/2024). From the start of the year until the 19th September Chinese equities were up just 1% vs MSCI North America +15%. MSCI China is now ahead of MSCI North America year to date!
There are a host of stats related to the rally. Two good ones I have come across include that the Chinese stock market went from a 52-week low to the 52-week high in just 2 weeks, and that on the 30th September not a single one of the 2,230 stocks in the Shanghai Composite delivered a negative return. It has been quite the move.
Trying to assess whether the policy initiatives announced so far will have a lasting impact or can sustain outsized index level returns in China is beyond our circle of competence, but we retain faith in our active managers to continue finding gems in what remains a still cheap, and highly inefficient market. That said, given the extent of the moves and the valuation rerating, you will be unsurprised that we have locked in some of the gains this week. We are finding lots of opportunities across the investment trust universe to redeploy capital. In the coming months and years investment trusts should benefit from a triple-whammy of the change in cost disclosure requirements, the falling rate environment, and a starting point of very wide discounts in a historical context.
Dan Cartridge – Fund Manager
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