Global investors with stakes in China’s stock markets are facing renewed concerns as recent economic data indicates a sluggish recovery. Monday’s second-quarter growth figures revealed that China’s economy is not only growing below target but also shows no improvement in its struggling property sector. Additionally, domestic consumers appear increasingly pessimistic and reluctant to spend.
This environment signals to investors that any significant recovery in the world’s second-largest economy, which has seen stock market gains of just over 1% this year, may take considerable time. “Being a China investor right now is frustrating,” said Phillip Wool, a senior managing director at Rayliant Global Advisors.
Despite this frustration, Rayliant has selectively invested in some Chinese stocks, viewing it as a value investment strategy aimed at identifying undervalued stocks with strong earnings potential. Wool noted that while prices should eventually correct upwards, the timeline remains uncertain.
After a 19% surge from a multi-year low in February to peaks in May, China’s benchmark CSI300 Index has hovered around the 3,400-3,500 mark for the past month. Similarly, the Shanghai Composite Index has dropped over 6% from its eight-month high in May.
Earlier support measures from Beijing, including a leadership change at the market regulator, initially sparked hopes for a turnaround and triggered a brief rally. However, persistent economic challenges and a lingering property crisis have dampened these expectations, compounded by rising trade tensions with the European Union and ongoing Sino-U.S. disputes.
“The problem with China is that this is a multi-year healing process,” stated Michael Dyer, investment director at M&G Investments. While authorities are taking steps in the right direction, he emphasized that they have not implemented the substantial measures many investors desire. “Until then, if you’re waiting for certainty, you’re not going to get it.”
Bargain-Hunting Amid Uncertainty
Some investors remain optimistic, citing attractive valuations and strong fundamentals, particularly within China’s emerging sectors like advanced technology and manufacturing. Chinese equities appear cheap, with the Shanghai benchmark index trading at a significantly lower price-to-earnings (PE) ratio compared to indices in the U.S., Japan, and India.
The forward 12-month price-to-book value for Chinese stocks stands at 0.95, compared to 1.26 for the broader Asia-Pacific region. “As value investors, we cannot ignore the opportunities in Chinese equities, but we must temper our enthusiasm given the macro and policy risks,” noted Kamil Dimmich, partner at North of South Capital EM fund.
Although he is slightly underweight in the Chinese market, his position is “much less so” than in previous years when valuations were higher. Notably, foreign inflows through the Northbound Connect scheme into Chinese stocks have reached 37.6 billion yuan ($5.18 billion) to date this year.
While sentiment toward China may be improving, most investors remain on the sidelines, waiting for a clearer path to recovery. The patience of those already invested is being tested. “It’s painful and stressful being a contrarian,” Wool remarked. “For better or worse, as a long-term active investor in China, I’m used to this.”
