EQUITY ‘PUT’: Chinese stocks surged as authorities came to the rescue of its beleaguered equity markets. This ‘equity put’ saw Vice premier Liu’ all-in attempt to try clear up all investor concerns in one go, from ‘as soon as possible’ end to tech sector crackdown, to a commitment to resolving property developer risks. This came after Chinese equities’ epic 70% slump vs US the past year, and with bargain 50%-off valuations (see chart), despite similarly large tech sectors. A government policy ‘put’, improving economy, and cheap valuations is an attractive mix. An improving China also has positive impacts from north Asia to Europe and to sectors like luxury.
STEALTH SELL OFF: With focus on the Ukraine crisis and Fed’s moves, China’s markets saw a ‘stealth’ crash this year, with the broad MSCI China (MCHI) down 29%. This has two drivers. Most importantly, rising domestic risks, as world’s no.2 economy struggles with property sector debt problems and its zero-tolerance covid strategy see’s new lockdowns, in tech-hub Shenzhen and now Shanghai. Adding to uncertainty has been global risks, with China’s perceived support for Russia, and the US SEC’ recent move to start the 3-year delisting clock for Chinese ADRs.
MORE REWARD THAN RISK: We see little appetite from the authorities to provoke more trade disruption. As the world’s largest manufacturer and exporter they have the most to lose. Yesterday’s statement vowed to keep the stock market stable and support China companies’ ADR listings. We see the economy beginning to turn, with latest industrial production and retail sales up a better than expected 7%. Lockdown risks are real, but with less impact than previously. China is the only major country cutting interest rates to support the economy and has room for more with inflation only 1%. The market is one of the world’s cheapest, with a P/E ratio of 9x.
All data, figures & charts are valid as of 16/03/2022