How can stockpickers cash in on China’s economic recovery?
Instead of chasing the Chinese equity market rally, investors should look for local stocks which derive a big chunk of revenues from the Chinese market, according to a new report.
Investors tempted to load up on Chinese equities after share prices surged into July are being urged by global economics forecaster Oxford Economics to try other, more cautious ways of gaining exposure to the Chinese market’s upside.
Key Chinese equity index the Shanghai Composite is up nearly 15 per cent since June 30, and gained 1.2 per cent in Monday trade to 3,226 points — its highest since February 2018.
Oxford Economics said it was their belief that China’s rapid equity rally was fuelled by sentiment rather than improving fundamentals.
“Chinese equities have surged in recent days, but we wouldn’t chase this rally,” Oxford Economics director of equity strategy Daniel Grosvenor said.
Grosvenor suggested the Chinese stocks rally could be vulnerable to a sharp reversal if market news were to turn negative, and is a recipe for volatility.
“Indeed, the rally has been accompanied by a sharp increase in margin trading debt which has been drawing unfavourable comparisons to the speculative bubble in [Chinese stocks] in 2015,” he said.
Chinese equities had yet to reach levels of leverage seen in the 2015 bubble, which hit a peak of 2 trillion yuan, he stressed.
But, the current trajectory of margin trading was similar and lending stood at around 1.25 trillion yuan.
And yet Oxford Economics is broadly bullish on the Chinese economy and its growth prospects as a whole, with data pointing to an acceleration in credit growth supportive of an ongoing economic recovery.
China-correlated equities offer better value, said Grosvenor.
Developed market stocks with a high China revenue exposure are currently trading at a discount to the Chinese market, he said.
And these stocks are less exposed to adverse swings in domestic investor sentiment, he said.
“An alternative way to gain broad exposure to a China reflation theme is via ‘old economy’ cyclicals such as materials, industrials and financials,” said Grosvenor.
These developed market stocks have historically performed well with the Chinese economy and its credit cycle.