Can Chinese markets continue to reward investors post 25% rally?

During the calendar year 2023, the CSI 300 Index was down 11 percent while Hang Seng lost 14 percent. Over the past year, investors have been seeking out companies with strong growth prospects that are trading at attractive valuations.

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Recently, China’s central bank and financial regulators implemented policy measures to rejuvenate the struggling property sector, address the slowing economy, and tackle deflation. This shift in policy has triggered a notable surge in Chinese stock markets.

According to experts, by easing monetary conditions, reducing household debt, and directly supporting consumers and businesses, the government aims to create a more favourable environment for economic growth and job creation.

“Despite ongoing challenges, China's market is positioned for a more positive outlook. The government's recent policy initiatives, combined with attractive valuations and compelling investment opportunities, make this a favourable time to consider investing in the Chinese market,” said Niranjan Avasthi, Senior Vice President and Head-Products, Marketing and Digital at Edelweiss Mutual Fund.

Investment options

There are four mutual funds specifically focused on the Greater China region, which includes mainland China, Hong Kong, and Taiwan.

Edelweiss Greater China Equity Off-Shore Fund is the biggest scheme in the category with assets under management of Rs 1,244.31 crore, followed by Nippon India ETF Hang Seng BeES, Mirae Asset Hang Seng TECH ETF and Axis Greater China Equity FoF.

In terms of returns, Mirae Asset Hang Seng TECH ETF has delivered 44.27 percent returns on a one-year basis, followed by Nippon India ETF Hang Seng BeES (38.96 percent), Axis Greater China Equity FoF (29.99 percent) and Edelweiss Greater China Equity Off-Shore Fund (29.28 percent).

Can the rally sustain?

While there has been a fair amount of monetary stimulus provided to the Chinese economy, sustainable pick-up to higher levels of growth will require strong fiscal support as well.

On October 8, the CSI 300 Index closed 5.9 percent higher, after surging 10.8 percent earlier during the day, while Hang Seng slumped 9.4 percent in the absence of an announcement of concrete measures on the stimulus front.

However, experts believe that with the measures announced so far, the stock market bounce-back and more importantly expectation of more support to follow, short-term money flows could continue into the Chinese market.

“China in any case was amongst the bigger underperforming emerging markets till recent times available at very low valuations. However, post the recent surge, valuations have caught up and beyond a point strength/revival of earnings growth will start becoming more important,” said Gaurav Misra, Head - Equity, Mirae Asset Investment Managers (India).

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Going forward, the magnitude of fiscal stimulus and its priority (i.e. sectoral focus - infrastructure versus consumption, etc) will determine further sentiment towards the market, he added.

What should investors do?

Nirav Karkera, Head of Research at Fisdom, believes that Chinese markets are starting to look good.

“There are early signs of the macros getting in favour of a turnaround. Also, from the valuations proposition, when you look at China in conjunction with how Indian markets have been playing out, there is more comfort on the China front,” he said.

While investors who are bullish on China recovery can look to invest, they should keep in mind that there might be intermittent bouts of profit-booking.

“At the political level, there has been a good stimulus package offered to attract foreign investor inflows into the country. Also, discounting the property crisis, the fundamentals of many Greater China companies from other sectors remain very strong,” said Rushabh Desai, Founder, Rupee With Rushabh Investment Services.

However, Desai warns that Chinese markets still have a long way to go, and therefore, investors need to be careful.

“People who are invested can remain invested as I see a lot of upside opportunity. But there is no need to get overexcited at this moment as there is still a good amount of road ahead for the country’s recovery. New investors can stay calm till there is consistency in upside opportunity and macroeconomic stability,” Desai said.

US versus China

For investors looking at global diversification, the US markets have been the top priority over the past 10 years while China takes the cake when it comes to diversification in emerging markets.

As per note by Franklin Templeton, in the nearly 15 years since January 1, 2010, the SSE Index is down 3.5 percent while the S&P 500 Index is up 391 percent. The SSE Composite Index also known as SSE Index is a stock market index of all stocks that are traded on the Shanghai Stock Exchange.

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Does China coming back on track mean higher allocation to this emerging market than the US?

Karkera believes that in the US versus China debate, the US continues to have a strong positioning. “It may not make sense to shift money from the US to China. If there are incremental allocations, then one can diversify into China. Even if one wants to move from the US to China, it should be a diversification call,” said Karkera.

Keep in mind that Chinese equity markets present an interesting value opportunity. However, low valuations alone do not guarantee high returns — what's cheap can stay cheap.