Are Chinese stocks ready for a bull run?
Chinese stocks have underperformed this entire year, in fact since last November, even when they hit an all-time high. Regulators have shaken confidence in Chinese tech companies by challenging them over monopoly practices. Authorities are issuing fines on a company-by-company basis in what used to be China’s hottest industry.
Policymakers have also resumed their efforts to remove excessive leverage from the Chinese system. But above all, China is suffering from a crisis in consumer confidence. What would this trick do?
Companies that make consumer staples and discretionary spending have been the two worst performing sectors since their record highs in February. Defensive sectors such as energy, utilities and banking have performed best since then. The technology, exceptionally, is flat.
The CSI 300, which represents the 300 largest listed companies in Shanghai and Shenzhen, has tested dips below the 5,000 level four times since early March. After stumbling, the index finally seems to have regained its legs, gaining 6.6% since May 13.
It is therefore time to reposition ourselves on Chinese equities, according to Societe Generale. The French bank notes that Chinese stocks are trading at a 5% discount to their cycle-adjusted P / E ratio of 19.4. The US market trades at a premium of around 55%.
Chinese stocks were the first post-pandemic stars. The Chinese market rose 59.0% from its COVID low on March 20, 2020 to an all-time high of 5,807.72 for the CSI 300 on February 10.
This made Chinese stocks one of the best performing markets in Asia last year. But they have since ceded that land. Indian stocks are currently Asia’s biggest stars, oddly enough in my opinion. The Sensex benchmark in Mumbai has risen 66.4% over the past year and has been little affected by the world’s worst COVID-19 outbreak in India in the past two months. Again, the market seems completely out of touch with what’s going on in the real world.
Only South Korean stocks, which were the best performing in Asia in 2020, are close to rivaling the performance of Indian stocks. The world’s shortage of semiconductor chips has been a boon to Korean foundries and electronics companies. Seoul’s benchmark Kospi has risen 56.1% in the past 12 months. But it’s still 10 percentage points behind Mumbai’s performance.
In the real world, too, China’s recovery from COVID continues, but with fragile consumer confidence. The vaccination rate remains low as China continues to play the “pandemic policy”. Chinese vaccine producers export nearly half of the doses they manufacture, to keep Beijing’s promises of pandemic aid made to other governments.
Chinese citizens have returned to pre-pandemic trends. The country had gradually lost its reputation as a nation of excessive savers, gradually shifting from generations of farmers conditioned to saving money for a rainy day to a more modern economy of earning and spending. The service sector represented an increasingly important part of the economy.
The pattern broke after the pandemic. Chinese families are saving around 40% of their disposable income, apparently taking a wait-and-see approach, even as industrial production has returned to pre-COVID levels. “This is not what a recovery is supposed to look like,” Standard & Poor’s Asia-focused economists Shaun Roache and Vishrut Rana write in a report today. “Urban households generally save more. Rural households, generally with less income, also save more.”
Rural consumers and migrant workers have a smaller buffer. It will take time to rebuild if job losses have temporarily reduced their incomes, even though jobs are now being offered again. Urban savings now stand at around 40% of income, while rural families keep nearly 20% of their net salary.
Asia’s early success in containing the coronavirus has also delayed its vaccination efforts. There is little urgency to get vaccinated here in Hong Kong or on the mainland. Although local outbreaks do occur, they are small scale and normally quickly contained. This means the virus has yet to hit most of the people of greater China.
In Southeast Asia, it is the lack of access to vaccines that is holding back economies. These developing countries cannot put COVID behind them because they don’t have the drugs they need. In East Asia and greater China, however, it is criminal appeasement, not lack of access to vaccines, that is holding back efforts.
Hong Kong could even throw away millions of doses, after reserving 7.5 million vials of both the drug Pfizer (PFE) -BioNTech (BNTX) and the Chinese-made Sinovac vaccine, to cover a population of 7.5 million. inhabitants. Vaccines are free here in Hong Kong. But only 29 doses were given per 100 residents, and you can come in to get your free vaccine any day of the week. The vaccination rate is only slightly higher in mainland China, at 38 doses per 100 people, with all vaccines offered here in Asia requiring two doses for full effectiveness.
It will take a clear COVID exit strategy for Chinese consumers to regain confidence, think S&P’s Roache and Rana. The current model of tackling COVID followed by small outbreaks and tough lockdowns that grab the headlines locally does not inspire confidence that the disease is behind us. There is no precise figure for “herd immunity”, but some 60% to 80% of the community would likely need to be vaccinated to pave the way for the economic exit strategy. At the current speed, it will already take mid-2022 to reach this kind of level in China, and that’s without adjustment for new variants that could complicate matters.
In the absence of clear signs of a social recovery from COVID-19, it is highly likely that Chinese savers will inject their money into property. It’s a proven strategy, and for good reason. In the decade to 2020, real estate produced an annualized return of 7%. This compares to 6% for Chinese stocks, which suffer from intense periods of volatility. Twice in the past few years stocks have lost over 25% in a year, in 2011 and 2018. This isn’t where you want your money to grow if you’re saving. It was not until 2014 that ownership fell, and even then by only 2%. Bank accounts return only 2.2%, slightly above the inflation rate of 1.5%.
Chinese stocks are notoriously driven by momentum. Shanghai and Shenzhen are dominated by retail investors who like to “blow up” stocks for speculative purposes, buying and selling quickly regardless of fundamentals. The wok remains for the moment in the kitchen cupboard. It will take more investor confidence to pull it out and put it on the open flame. There might be an idea starting to happen, but Chinese real estate is a safer bet than mainland stocks at the moment.
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