By Reshma Kapadia
Chinese stocks have gone from unloved to the best-performing market this year in a matter of 10 days, and Louis-Vincent Gave, head of the Hong Kong-based financial services firm Gavekal, sees the beginning of a bull market.
The iShares MSCI China exchange-traded fund rose 6% Wednesday morning to $55.67. It has gained 35% in the past two weeks as Beijing has rolled out coordinated efforts to stabilize its economy, with more interest-rate cuts, plans to recapitalize six of its biggest banks to deal with the pressure of rising debt from the property bust, and vows to introduce more stimulus.
Details have yet to be disclosed on the size and scope of some of this stimulus, so the market could see some hiccups in coming weeks based on what Beijing releases. But while China's economy still faces structural challenges and battered household and business confidence could take time to heal, investors tend to make a lot of money when situations go from extremely bad to just bad -- especially in a market most people had steered clear of due to geopolitical and economic concerns. And Beijing is now at least showing the intention of getting in front of its economic problems -- a notable shift. "We are seeing a narrative change [among investors]," Gave, a veteran Asia watcher, said in a webinar. "China has started a bull market. When these take off, they build momentum on their own."
China's market is prone to bull-bust cycles every five years, with bull runs often generating 100% gains -- and Gave sees the recent rally as the beginning of one of these periods. Underneath the momentum is a 180-degree shift in the backdrop for stocks that are deeply undervalued on a range of metrics. Many of the negatives -- horrible momentum, policy headwinds, and a weak currency -- have flipped.
"If you don't invest now, when do you invest?" Gave said. "Things are cheap, with positive momentum and are now being pushed up by the government. This is the trifecta."
Part of his optimism stems from the fact that the Federal Reserve cut rates ahead of Beijing's moves. That shift changes currency dynamics and the rationale for many Chinese entrepreneurs and others hanging onto dollars in Hong Kong or elsewhere.
Those holding their money in dollars in Hong Kong, earning 5% before the Fed cut, were generating returns of closer to 8% to 10% in renminbi terms because the Chinese currency was weakening . But that calculus has shifted enough as a result of the rate cut that those investors are now looking to put their money elsewhere, such as in Chinese stocks -- in Hong Kong if not the mainland. That buying is contributing to the parabolic move in the market.
Gave says that what some describe as policy missteps in Beijing's decision to crack down on the property market and private sector in recent years could have been part of a broader plan to address the country's vulnerabilities. He cited rising debt levels, growing social inequity, and overdependence on the West as the U.S.-China relationship deteriorates.
After the U.S. began restricting China's access to semiconductors in 2018 and riots erupted in Hong Kong, in part due to rising inequality and unaffordable housing, Beijing may have made a conscious choice pop its own property bubble, he argues. That would have helped to make housing more affordable and reallocate money from the real estate sector to technology and manufacturing to increase its self-reliance, Gave says.
Now, as China has become a leader in electric vehicles, nuclear power plants, railroads, and batteries, Beijing might look to revalue its currency upward so that the recent wave of protectionism and tariffs from the West doesn't intensify. And with a multiyear decline, property has become more affordable, leaving room for Beijing to stimulate its economy again.
To tap into this bull market, Gave favors Macau casinos, which are highly regulated. He also likes internet stocks such as Tencent Holdings that don't face as stiff competition and intense pressure on margins as electric-vehicle makers like BYD.
Gave also favors energy companies like PetroChina, which is protected from competition, and even the education sector, which was hit hard by regulators a couple of years ago. "A lot of money is being spent on after-school tutoring," Gave says. "The end result of the crackdown was a massive increase in regulation that crated barriers to entry to the established players."
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 02, 2024 15:06 ET (19:06 GMT)
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