Investors are fleeing China - is it time to buy?

Market sentiment towards China is at rock bottom. But as Lars Henriksson explains, that could make for an interesting short-term trade.

Chinese stocks have disappointed investors

Money is pouring out of China right now.

A BoA Merrill-Lynch survey shows that between December and January, institutional investors dumped Chinese equities in a hurry. The survey shows a swing from net 15% 'overweight' to net 14% 'underweight'. At the same time, growth expectations in China fell to the lowest level in five months.

Advertisement - Article continues below

In general, economic data coming out of China barely meets market estimates, but we all know focusing on China's statistics is a mugs' game. If you want to make money from this market, you need to look at other factors.

This is not a fundamental change of heart, as I remain concerned about long-term problems in China.

Sentiment towards China is at rock bottom, and when I see that, I perk up. I believe China could make an interesting short-term trade at the moment.

China is cheap for now

price to earnings

price to book

And what's more, by this time next month, China could look a whole lot different.

Advertisement - Article continues below

On 5 March, the National People's Congress (NPC) will convene, which may give the market an update on the long-term structural changes and targets that China's new leadership is trying to implement. It could contain details on economic growth, money supply targets and a more detailed roadmap of reform implementation.

Advertisement - Article continues below

BNP Paribas expects reforms in local government finances, the financial sector and land to be gradually implemented through the year. This area is the most important aspect of the China story, but which requires considerable investment resulting in fatigue among many investors. However, historically, these kinds of events have led to substantial rallies.

37% in five months?

So how to play this?

At the moment, most of the long-term money is parked, in descending order, in the following sectors: IT, telecoms, consumer discretionary, consumer staples and energy. Hence, most stocks in these sectors are over-owned and come with steep multiples.

Instead, what tend to do well are diversified financials, construction materials, real estate and banks. Other stocks that are out of favour include high beta and those more closely linked to the domestic economy.

Another way to play is the Hang Seng China Composite Index (H-shares) constituting arguably the best companies as they act as the shop window of modern China listed in Hong Kong.

BoA Merrill Lynch found that after the global financial crisis in 2008 and the peak of HSCEI index in November 2010, the market experienced three big rallies lasting on average five months and yielded 37%. That magnitude is supported by the fact the HSCEI index is currently trading at a 28% discount to its five-year average.

There are reasons to be worried about China, but that doesn't mean it's not cheap. I think we could be looking at double-digit gains here, in a short period of time.




Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular


House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020