Marco Mencini, Senior Portfolio Manager Equity di Plenisfer Investments SGR
After a difficult year for the Chinese stock market - China has gradually resumed attracting investors’ attention in the last quarter of 2022.[1]
This renewed interest has enabled the index to recover in just a few weeks about 30 percent in value from its October lows, the date of our last commentary on the potential of the Chinese market.
This new investor interest is due to the decisions of the Chinese Government aimed on the one hand at mitigating the measures to fight Covid and, on the other, at the adoption of measures to contain the crisis in the real estate sector in which several observers estimate that over 180 billion dollars of credit will be injected.
We believe that news in these areas could set the stage for a rebound in China's economic growth, which, according to the consensus, could rise from the approximately 3% recorded in 2022 to 5% in 2023, with GDP rising both because of the measures described and the base effect from the weak economy in 2022. The restart is also expected to be driven by consumption, which, in light of post-lockdown reopenings, could grow by about 10 percent over the course of the year and, thus, at a higher rate than in 2022 (up about 3 percent).
In light of recent market dynamics, now the question is: Has the Chinese equities rally begun?
Chinese equities, despite the recovery in the last quarter of 2022, now express multiples averaging 11 times expected earnings, values significantly lower than the average of the past 5 years of about 14 times earnings.It should be remembered that the downward earnings review cycle in China started earlier than the rest of the world and that equity markets operating margin rose from around 14% between 2019 and 2021 to 10.8% in 2022.
Revenues were also revised down in 2022 due to low inflation in China and the slowing economy.
We believe that most of the downward revisions to corporate earnings and margins are already included in today's stock prices, so we could see double-digit earnings growth, supported by operating leverage, in an economic recovery scenario.
In conclusion, at Plenisfer we believe the probability of positive returns from Chinese equities over the next 12 months is extremely high, given the likely recovery of the economy and the current level of valuations.
Extending the investment time horizon beyond the next 12 months, thinking from a medium- to long-term perspective, we believe it will be preferred to avoid issues related to "common prosperity" and "technology trade war". Only 32% of the companies represented in the index are unrelated to these themes: in our opinion, it will be among these that individual opportunities related to long-term themes should be selected, such as, for example, energy transition.
[1] Source: Bloomberg. It should be noted that all data reported in this document have the same source.
Disclaimer
This analysis has been prepared for informational purposes only. This document does not constitute an offer or invitation to sell or buy any securities or any business or business described herein and does not form the basis of any contract. The above information should not be used for any purpose. Plenisfer Investments SGR S.p.A. has not independently verified any of the information and makes no representation or warranty, explicit or implicit, regarding the accuracy or completeness of the information contained herein and the same (including their respective directors, partners, employees or consultants or any other person) will not, to the extent permitted by law, no responsibility for the information contained herein or for any omissions arising therefrom or for any reliance that either party may place on such information. Plenisfer Investments SGR S.p.A. assumes no obligation to provide the recipient of this document with access to further information or to update or correct the information. Neither the receipt of such information by any person, nor the information contained in this document constitutes, or will be considered as constituting, the provision of investment advice by Plenisfer Investments SGR S.p.A. to such subjects. Under no circumstances should Plenisfer Investments SGR S.p.A. and its shareholders and subsidiaries or their employees be directly contacted in relation to this information.
