Ghadir Cooper, Global Head of Equities, recently joined a round table with Pensions & Investments to discuss the opportunity set in China. Despite slowed growth and trade concerns, she believes there are several reasons why investors should remain optimistic.
Despite last year’s slowdown in the Chinese economy, its shift to a domestic services-driven economy is driving economic growth. Looking ahead, how does this shift affect your outlook for Chinese equities?
There is no denying that the trade dispute between China and the U.S. has had a detrimental impact on the Chinese economy, both in terms of confidence and in terms of foreign investment. Despite the slowdown, we believe that economic growth will continue, but potentially at a slower pace. We expect that the administration’s structural goals—to transform the economy to a service-driven one, upgrade to more value-added manufacturing, clean up the environment, and better utilize the country’s resources—will lead to a natural slowdown in the Chinese economy, and level out at a more normalized rate.
However, if we look at the Chinese market itself, and specifically at corporates, we’re very encouraged. We are seeing positive and resilient earnings momentum among companies, especially domestic oriented ones. They have attractive valuations. They also benefit from policy expansion that is now taking hold, and will likely help corporate earnings going forward. As domestic factors—including changes in demographics, urbanization trends, and the rise of millennials—become greater growth drivers and support consumption going forward, Chinese equities look increasingly attractive to us.
Year-to-date, the Chinese stock market has rebounded since its slump last year. What fundamental factors have underpinned that rally, and do you expect to see more interest from foreign investors?
Shorter term, the market has rebounded from the lows seen last year, which were driven by concerns about the global economy and trade issues. Over the longer term, as discussed, we expect that fundamental changes to the economy will drive corporate earnings. China has opened its domestic equity market in very gradual stages over the past several years. Previously, qualified foreign investors faced a lot of restrictions, making it difficult to invest. More recently, we have seen the Chinese authorities clearly move to open the market further, both on the equity side and the fixed income side. Since 2014—with the Shanghai and Shenzhen Stock Connect links, and with the allowance of wholly owned foreign entities—China’s market has become much more open, and has improved the ability for institutional investors to gain exposure to the second largest economy in the world. In fact, Barings now has an office in Shanghai, with the aim of providing “local to local” service to investors in the region.