The valuation of Chinese equity markets has become far more attractive after the recent correction. MSCI China is now only valued at 53% of the S&P 500, a historic low. Given the expected additional fiscal policy stimulus and further monetary policy easing, Chinese asset prices will likely see support. CIO maintains a positive view on the Chinese equity market for long-term investors.
Oversold Chinese stocks present a potential tactical opportunity
By Citi Wealth Insights |
The recent surge in COVID-19 infections in China hit a two-year high on Tuesday, driving stocks in the region to end the day at 21-month lows and raising serious concerns about the economic costs in the government’s quest to contain the disease. Makers from flash drives to glass for Apple’s iPhone screens are facing large setbacks as they comply with new stringent curbs, further straining global supply chains. Four cities (including Shenzhen, the home of major local tech firms like Huawei, Tencent, ZTE, Oppo, etc.) have been locked down, and Shanghai is also at risk of a lockdown.
China Property Risks Small Relative to Global Capacity to Absorb
By Citi Global Wealth Investments |
Global financial markets were rocked overnight with a highly correlated selloff across the world. Global equities fell about 2.0% with all regions and 10 of 11 sectors negative. US markets closed in the red with S&P 500 down 1.7%, Dow Jones -1.8%, and NASDAQ -2.2%. The catalyst was the well-telegraphed news that Chinese property developer Evergrande would not make loan payments yesterday (Sep 20).
To build more resilient portfolios, Citi analysts have long argued for diversification from idiosyncratic country risks. Regionally-diversified equity portfolios have a history of stronger results than “home-only” portfolios when a crisis hits. For global investors, it is important not to look backward at strong gains in markets, but forward when corrections present opportunity.
The initial selloff resulting from China’s regulations on the tutoring industry is fueled by margin deleveraging and fund redemptions, which is likely to be short lived. Between now and sustained recovery, however, there is likely to be a period of volatility, as investors assess impact on earnings. But looking out 1 year and beyond, Citi analysts remain convinced that China’s consumption and technological development could still offer attractive returns.
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