Emerging markets: Stimulus unlikely but China opportunities remain

China faces slowing growth and weak consumer confidence. But there are opportunities for investors willing to take a closer look, argues PAUL WIMBORNE

• Economic stimulus unlikely 
• But China equities look good value
• Find out about Pendal Global Emerging Markets Opportunities fund

CHINA’S economic downturn is starting to create attractive opportunities for equity investors, though a mixed performance across the economy means a cautious approach is warranted, says Pendal’s Paul Wimborne.

Beijing’s policymakers are struggling with a mix of slowing growth, weak consumer confidence and rising youth unemployment, as the brief spark of activity after last year’s COVID lockdowns fizzles out.

Markets latched on to a dovish statement from last week’s politburo meeting that said the government planned to step up “countercyclical measures”.

But there are few real signs of significant stimulus, says Wimborne, co-manager of the Pendal Global Emerging Market Opportunities fund.

“There is a lack of confidence in China driving this weakness – so the question is how does the government assess and react to that?

Long-term focus

“We think the key priority for the Chinese government remains building long-term economic and financial system resilience and growth hasn’t yet fallen to the levels that would lead them to aggressively stimulate.

“We think they will continue to push through mini stimulus measures in certain areas where they would like to encourage growth — but we don’t think they’re at a point where we’ll get a big stimulus plan.”

Wimborne says Beijing’s focus on long term resilience means some of the stimulus measures the market is hoping for — like expanding credit availability for the property sector — are unlikely to eventuate.

“The key policy plank that has been in place over the last three years is to shrink the size of the property industry and consolidate around the better run companies with stronger balance sheets.

“We believe that is still a key policy plank for them and it’s very unlikely that they are going to want to shift away from that unless conditions get much worse.”

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Direct stimulus for consumers — echoing the West’s policy measures during the pandemic — is also unlikely, says Wimborne.

“The risk of these policies, as we have seen in the West, is inflation. The government has stated that they do not want to move down that path. They don’t think handing out free money is a good way to manage an economy.”

Large-scale stimulus unlikely

The upshot for investors is that any stimulus is likely to be narrowly targeted and aligned with Beijing’s long-term policy outcomes.

“So, for example tax exemptions on electric vehicle sales – that is aligned with the direction they want to take the economy, reducing demand for oil and promoting the size and scale of the domestic electric vehicle manufacturing industry.

“But these are small scale — they help at the margin, but they’re not going to be a big stimulus.”

Value to be found

The implication for investors is not to get fooled by apparently attractive valuations but instead tread a careful path and be selective about investments.

“China’s equity market is very cheap,” says Wimborne.

“While economic growth is slower than people were anticipating at the start of the year, it’s not terrible and there are certain areas where growth is holding up relatively well.

“That means there are parts of the economy we are happy to get exposure to — and parts that we would like to avoid.

“Overall, it leads us to be slightly underweight China but there are key areas which we think show decent growth trends with cheap valuations that are interesting from an investment point of view.”

Wimborne says his preferred investments in China include premium domestic brands Tsingtao Brewery and Proya Cosmetics alongside companies exposed to the energy transition like natural gas distributor ENN Energy and solar panel glass maker Xinyi Solar.

About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme and Ada Chan.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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