The battered Chinese stock market
WHEN China’s 2023 gross domestic product results were published in January, it met expectations of 5.2-percent growth. Under normal conditions, the data should not have caused big market gyrations. However, investors were thirsty for good news of some kind, which the data did not provide. It showed plain development without signs of progress in private consumption, and the real estate market is also under stress. For a market where the investors already had a negative bias, this just fueled more selling.
The stock market sell-off triggered huge amounts of sell orders linked to so-called snowball derivatives that were sold to private investors. These sell orders are not the sole explanation for the diving market; fresh selling was the main reason. In addition, the harsh Chinese official rhetoric after the Taiwanese presidential election scared investors once more and even provoked new comments about China as being “uninvestable.”
To judge China as “uninvestable” might be one reason for giving up on China. This does not really help the investors who want to have China in their portfolio. I agree on one issue: that China and the Chinese stock market are simply complex in many ways.
There is nowhere in the world I can point to where there is pure macroeconomic sunshine; this also applies to China. I, of course, also watch the real estate market with concern, though it’s predominantly the real estate developers that will collapse. Concerning private house owners, I am less worried. They might see house prices slightly under pressure, but not enough to create a crisis for the households.
Taiwan is certainly a cause for the global headwind against China that also sent the stock market lower. In the big speeches, we do not recognize any change in the official Chinese wording about Taiwan. The Taiwanese presidential election was followed by harsh Chinese comments, and that was to be expected.
We have also done extensive research in understanding Chinese military power. The very short conclusion is that China can invade Taiwan. However, China cannot match the US military and will not be able to do so in the next five to six years. I am not forecasting a military conflict at that point in the future. On the contrary, I argue that too much fear about a conflict is priced in share prices.
Overall, the Chinese stock market might look cheap, but I see big differences. Fundamentally, I generally avoid having banks in the portfolio, but more sectors are moving toward overcapacity. Especially industrial/manufacturing, but potentially also chemicals and electronics goods. In my world, this is a clear indication that only a part of Chinese stocks is attractive. Interesting sectors are, for example, green and renewable energy, hightech companies, a broad spectrum of digital companies, software and many parts of the service sector.
As a response to ongoing bearish stock markets, the government introduced different initiatives it was hoping would stabilize the market. The initiatives range from lowering the stamp duty on stock trading, reducing the number of IPOs (initial public offerings) and even making use of an intervention.
This does not make me excited; instead, actions like an intervention should be avoided at any time. Instead, politicians should
generate healthy conditions for companies. Stock markets will then for sure perform well.
The government initiatives also include an easing up for listed companies to execute share buyback programs. This is extremely encouraging as it can be a game changer for the Chinese stock market. Share buybacks were a strong force behind the positive American stock market during the past decade.
It is worth it for investors to observe that the new rules are very loose. This means that cheap shares that are bought back can be sold to staff or used at the executive level. From an investor perspective, this is bad, and only the companies that cancel the shares they have bought back are interesting in this context.
International investors have partially offloaded Chinese shares due to the global political headwind. I argue that many investors are not paying attention to serious efforts that are being made between the United States and China to reestablish official relations at all levels.
A very good example was the January 26 and 27 meetings between US government representative Jake Sulivan and Chinese Foreign Minister Wang Yi in Thailand. It was not secret though not in the press limelight either. It was not the first and this latest meeting most likely will lead to a new telephone conversation between US President Joe Biden and China’s President Xi Jinping.
I would regard this potential shift in the relationship between the US and China as a very positive step that is certainly not priced in by international investors yet. When I combine all these factors, I consider the interesting part of the Chinese stock market as 35 to 40 percent undervalued compared to the global stock markets. The art is to find the undervalued part.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience, and a power entrepreneur in investment and finance. Lundgreen is an international columnist and speaker on topics about the global financial markets.