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FOR GLOBAL INVESTORS, CHINA IS A SLOW-BURNING TRADE

By Laura Matthews , Carolina Mandl and Rae Wee
July 16, 20241:32 PM GMT+2Updated 7 days ago
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Item 1 of 2 Investors look at an electronic board showing stock information at a
brokerage house in Shanghai, China, March 7, 2016. REUTERS/Aly Song/File Photo
[1/2]Investors look at an electronic board showing stock information at a
brokerage house in Shanghai, China, March 7, 2016. REUTERS/Aly Song/File Photo
Purchase Licensing Rights, opens new tab

NEW YORK/SINGAPORE, July 16 (Reuters) - For global investors with money in
China's stock markets, the latest economic numbers are not of any comfort and
just a reminder that the recovery they are betting on will take a while to
happen.
Monday's second-quarter growth figures in China pointed not only to an economy
growing below target, but also showed there is no sign of improvement in its
anaemic property sector and the domestic consumer is more pessimistic and
unwilling to spend.
Advertisement · Scroll to continue

That backdrop is a signal to investors it will be a long wait before the world's
second-largest economy is able to have any meaningful recovery that lifts its
stock market, which is up just over 1% this year.
"Being a China investor right now is frustrating," said Phillip Wool, U.S.-based
senior managing director at asset manager Rayliant Global Advisors.
Rayliant has been selective but buying some Chinese stocks, which Wool likens to
value investing, or a strategy of picking cheap stocks with high earnings
potential. Wool says prices should eventually correct higher, but he has no idea
when.
Advertisement · Scroll to continue

After surging some 19% from a multi-year low in February to its highs in May,
China's benchmark CSI300 Index (.CSI300), opens new tab has been middling around
the 3,400-3,500 range for the past month.
The Shanghai Composite Index (.SSEC), opens new tab has also fallen more than 6%
from its eight-month high hit in May.

Reuters Graphics
A slew of support measures from Beijing earlier this year to prop up its ailing
stock market, which saw a change of leadership at the market regulator, had
spurred investor hopes that the tide could be turning and sparked a short-lived
rally.

But a few months on, the country's shaky economic recovery and lingering
property crisis continue to remain an overhang, with geopolitical challenges
spanning rising trade frictions with the European Union and protracted Sino-U.S.
tensions adding to headwinds.
"The problem with China is this is a multi-year healing process," said Michael
Dyer, investment director of multi-asset at M&G Investments.
While the authorities and central bank seem to be taking steps in the right
direction, "they haven't come along with the bazooka that the rest of the world
wants. There's still the geopolitical uncertainty," Dyer said. "So until then,
if you're waiting for certainty, you're not going to get it."



BARGAIN-HUNTING

To be sure, some investors have piled in, citing attractive valuations and
strong fundamentals, especially for companies that fall under the country's new
growth sectors such as advanced technology and manufacturing.
Chinese stocks are cheap. The S&P 500 index (.SPX), opens new tab trades at a
price-to-earnings (PE) ratio of 23, Japan's Nikkei (.N225), opens new tab trades
at 22, India (.BSESN), opens new tab at 23 and the Shanghai benchmark index
(.SSEC), opens new tab is at half that number.

The forward 12-month price-to-book value for Chinese equities also stands at
0.95, compared with a value of 1.26 for the broader Asia-Pacific region.
"As value investors, we cannot ignore the opportunities in Chinese equities but
we have to temper our enthusiasm given macro and policy risks that China is
facing," said Kamil Dimmich, partner and portfolio manager at North of South
Capital EM fund.
He is slightly underweight in the Chinese market overall, but "much less so"
than a few years ago when valuations were high.
Foreign flows through the Northbound Connect scheme into Chinese stocks point to
37.6 billion yuan ($5.18 billion) worth of inflows to date. Inflows were 43.7
billion yuan in 2023.
Overall, the consensus seems to be that while peak pessimism towards China has
passed, most investors are still waiting on the sidelines for a more definite
recovery to play out. And the patience of those already committed is being
tested.
"It's painful and stressful being a contrarian and taking in all the negative
sentiment and seeing the false starts at a recovery," said Rayliant's Wool. "For
better or worse, as a long-term active investor in China, I'm used to this."
($1 = 7.2651 Chinese yuan renminbi)

Get the latest news and expert analysis about the state of the global economy
with Reuters Econ World. Sign up here.

Reporting by Laura Matthews and Carolina Mandl in New York and Rae Wee in
Singapore, Additional reporting by Gaurav Dogra in Bengaluru; Editing by Vidya
Ranganathan and Michael Perry

Our Standards: The Thomson Reuters Trust Principles., opens new tab

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