China: More Room to Rally?

 In Market and Investment Insights

Charlie Awdry, China equities Portfolio Manager, discusses the drivers behind the recent rally in the Chinese equity markets and the potential for further strong performance in the coming months.

Key Takeaways

  • Chinese equities have rallied this year on the back of easing in U.S./China trade friction and a pause in U.S. interest rate rises, as well as a move toward more pro-growth policies from the Chinese government.
  • There has been more interest in the domestic A shares market following the decision to increase the weighting of these Shanghai- and Shenzhen-listed stocks in global benchmarks.
  • China is still relatively unloved and cheap, providing room for Chinese equities to rally further.

Charlie Awdry: So we felt quite a rally in China, driven by a few things. I suppose, internationally, there’s been somewhat easing in the tension between China and the U.S. on trade friction. That’s been helpful. I think a lot of investors have been waiting for some good news on that. The other thing we’ve had is obviously in the U.S., the Fed’s gone back to being on pause on interest rates and that is obviously good for emerging market borrowers, it’s really good for sentiment in emerging markets, and that’s helped. And then domestically in China, I think investors have moved from thinking about glass half empty, obviously in the economy, to the glass half full of more monetary and fiscal policy easing to support equity markets, so probably those two things balancing out.

So I suppose the main thing is that Chinese equities are back to being unloved and pretty cheap. And you can see, unfortunately, in China, it’s quite emotional so you get very extreme positioning. We’ve seen some closing of extreme positions, I suppose, on a sort of negative side. And now that there’s a more positive relationship between the U.S. and China, perhaps people will engage, so I think that’s helpful. You’re also seeing a lot of policy support by the government and in time, we’ll see that pick up in terms of feeding through to the economy and probably to equity ownership as well. So I think those two things are quite supportive for 2019.

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C-0419-23654 12-30-20

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