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China’s Attractive Valuations, Low Exposures Among Investors, A Compelling Long-Term Investment

KUALA LUMPUR: China’s attractive valuations and low exposures among investors make it a compelling long-term investment, especially compared to expensive markets, which have outperformed in the last 12 months.

People walk along a street in the town of Sheung Shui near the border of mainland China in Hong Kong on January 4, 2023 ahead of the opening of the border on January 8. – The border has been effectively shut for nearly three years while China enforced a zero-Covid strategy of snap lockdowns, travel restrictions and mass testing that battered the world’s second-largest economy. (Photo by Peter PARKS / AFP)

Eastspring Investments research lead for equities, China Jingjing Weng said there have been some bright spots in China’s recent economic indicators.

“The worst for the economy appears behind us, although the road ahead remains bumpy.

“A sustainable market rally in China would require implementation details of the government’s equipment upgrade and consumer trade-in programme, as well as further fiscal and monetary easing. Signs that policymakers are moving ahead of the curve would also be a key catalyst,” she said.

Sharing more on China’s economic indicators and opportunities for investors, Weng said China’s infrastructure spending is expected to moderate this year as the central government focuses on containing the local governments’ already elevated debt-servicing burdens.

The government’s urban renewal projects can help to stabilise the property sector further but not cause a strong rebound. Nevertheless, the property sector should continue to exert less drag on the broader economy going forward, she noted.

Further, China’s exports and consumption will be key to helping the country achieve its 5 per cent gross domestic product (GDP) growth target for 2024.

Weng noted that amid geopolitical and trade tensions, China has been diversifying its export destinations from the United States (US) and Europe to developing countries.

In line with the key goal of developing ‘new quality productive forces’ highlighted in the 2024 Government Work Report, the government has indicated that it will encourage large equipment upgrades and consumer goods trade-ins.

Weng noted that this will help boost consumption.

Compared to China’s economic and market downturn in 2015/16, Weng also noted that the picture on the company front appears to be more encouraging.

“Overseas revenues account for 15 per cent of total revenues, up from 12.5 per cent in 2015,” she said.

While China’s growth is not as strong as before, Weng said it does not mean the market lacks opportunities.

“The capital goods, consumer durables, energy, banks, and utility sectors have delivered high single-digit to mid-double-digit returns year to date.

“For now, we are adopting a barbell investment strategy. We like companies with low valuations, stable dividend yields, and stable fundamentals.

“This is balanced against exposure to companies gaining market share from global peers or well positioned to benefit from the future technology boom in promising growth sectors,” Weng said.

She said China’s attractive valuations and low exposures among investors make it a compelling long-term investment, especially when compared against expensive markets, which had outperformed in the last 12 months.

“In our view, a sustainable market rally would require implementation details of the equipment upgrade and consumer trade-in programme, as well as further fiscal and monetary easing, such as cuts to interest rates and the reserve requirement ratio,” Weng said.

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