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Global banking fallout is vindication for China stock bulls

Tan KW
Publish date: Thu, 23 Mar 2023, 04:38 PM
Tan KW
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Bank rescues on both sides of the Atlantic. Global markets in turmoil. American and European policymakers rushing to turn the tide. In contrast, China’s markets were calm and buoyant on Thursday (March 23).

After countless scenarios of doom for Chinese assets in recent years, its markets stand out right now for their quiet gains. 

Following another day of turmoil in the US - when the Treasury Secretary sent financial shares reeling and the central bank chief cautioned that the fight against inflation was far from over - equities benchmarks in Hong Kong and the mainland rose, underpinning an advance of about 1% in a gauge of Asian stocks. 

The yuan was stronger as the dollar fell against its major counterparts and Chinese government bonds were steady, while yields on shorter-maturity Treasuries added to the sharp drop of the previous session.

None of this is to say China’s markets are problem-free - far from it - but there are no new pockets of crisis in the country’s financial system and economic momentum is building. The central bank is adding liquidity, consumer sentiment looks to be on the up, and there’s even evidence that the housing market may have avoided a hard landing.

“It’s almost strange to think that China is not at the epicentre of volatility right now - the world is not used to it,” said Nuno Fernandes at GW&K Investment Management in New York. 

The past few weeks have strengthened the case for owning Chinese stocks, purely because of the country’s resilience to problems afflicting the rest of the world, said Fernandes, a partner at GW&K. The firm, which oversees around US$47 billion , has almost 60% of the portfolio of its Emerging Wealth Equity fund in Chinese shares. It’s also invested in India, and has outperformed 99% of similar products over the past year. 

The resiliency of Chinese markets is putting a floor on other emerging markets, Goldman Sachs Group Inc’s emerging markets team wrote in a note on Wednesday. Currency and equity markets in Asia will be insulated from global volatility, partly because of better economic growth in China, according to Goldman.

It was also notable that the gains in Chinese stocks came as China Evergrande Group announced one of the country’s largest-ever debt overhauls. It was an event that some investors had once feared would trigger a systemic crisis. Yet China’s high-yield and investment-grade bond markets were subdued on Thursday.

Meanwhile, some of China’s technology companies are starting to see their business outlooks improve, as demonstrated by Tencent Holdings Ltd, AAC Technologies Holdings Inc and Kingsoft Corp.

Chinese banks stocks are among the world’s top performers this month, while markets in the US and Europe count the costs from three American bank failures and the rescue of Credit Suisse Group AG. 

Valuations of Chinese stocks in general look “very attractive”, said Fernandes. The MSCI China Index, the benchmark used by GW&K, is trading at just 10 times projected earnings versus the 17.5 multiple commanded by the S&P 500. 

Fernandes sees China bucking global trends as a good thing for the world at the moment. 

“China is the only major economy where consumers can actually be more optimistic,” he said. “The value of that has only increased.”

 


  - Bloomberg

 

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