The rebound
Chinese equities have rebounded, reversing the first-quarter downturn with a 6.5% gain in the MSCI China Index (in local currency terms) in April, outperforming most other major markets.
This recovery was fueled by several positive developments, particularly in the real estate sector. For one, a major developer reached an agreement to restructure its overseas debt and also, the Chinese authorities updated their policies to ease home purchase restrictions and lower mortgage rates. Although no single announcement can completely shift market sentiment, this collection of favourable news has significantly bolstered investor confidence.
Adding to the positive sentiment, Chinese government entities have been actively purchasing mainland stocks to stabilise the domestic market, while global investors are starting to return to Chinese equities after a period of selldown amid geopolitical and policy concerns. China’s State Council pledged to improve capital markets, through controlling IPO supply, encouraging dividend payouts, and enhancing corporate governance.
The confluence of government actions, shifting global investment flows, and policy support is creating a conducive environment for the recovery and growth of Chinese equities. However, investors remain divided as to whether this rebound of the Chinese stock market will be short-lived.
Split sentiment
Optimists highlight an improving earnings outlook for Chinese companies, noting April as the first month of earnings-per-share estimate upgrades for CSI 300 constituents in seven months, alongside technical indicators which suggests that the market may have already bottomed out.
Conversely, pessimists focus on economic indicators, arguing the rally might lack sustainability. Concerns over deflation also loom, suggesting that China's economic downturn could lead domestic investors to expect a Yuan devaluation.
Despite China's GDP growth in the first quarter of 2024 exceeding expectations, new economic data prints, including weakened retail sales and production growth, indicate persistent economic challenges.
Chinese stocks are underrepresented in global portfolios
No matter which camp you might belong to, one thing is certain - China is too big to ignore. Accounting for approximately 19% of global GDP, it has firmly established itself as a major player on the world stage. Since surpassing Japan as the world’s second-largest economy in 2010, China has been on a growth trajectory until recently.
Even with its status as the second largest economy, China remains underrepresented in major global equity indices. There are possibly several reasons for this:
Market accessibility – Historically, China's financial markets have been relatively closed to foreign investors. Restrictions on foreign ownership, capital controls, and the Qualified Foreign Institutional Investor (QFII) system have limited the ease to which international investors can enter the market. Although reforms such as the Stock Connect programs have improved access, challenges still remain.
Regulatory concerns - International investors often cite regulatory transparency and governance issues as barriers. The Chinese market is perceived to have less regulatory oversight compared to Western markets, which can deter inclusion in global indexes that prioritise governance standards.
Capital controls - China maintains certain capital controls that can restrict the free flow of capital in and out of the country. These controls pose a risk for global investors who need the flexibility of being able to repatriate funds as needed.
The Chinese equities alphabet soup
Adding to this complexity are the different types of shares that make up the Chinese stock market.
Looking at the different indices representing the different share types, there is a large dispersion between the different types of shares.
The best-performing index in April was the Hang Seng China Affiliated Index, which represents Red-chips, those known as state-controlled companies incorporated outside of the country, and listed in Hong Kong. The NASDAQ Golden Dragon China Index, which tracks the US-listed Chinese companies, performed the worst, in April, among the Chinese equity indices. Though, in May, it has been so far the strongest performer as of 13 May, 2024.
Narratives of single-country indices
The key takeaway from the chart is not only to compare Chinese equity indices with global stock market performances, but also to highlight the significant variation in performance, even within China itself.
If you see the recent upturn in China's equity market as the beginning of a broader, lasting recovery, you might consider investing in one of the many diversified China equity funds on the Endowus Fund Smart platform. These funds cover various market segments, including A shares, H shares, P-chips, Red-chips, and N shares.
Conversely, if you have reservations about the sustainability of the Chinese market rally, maintaining a globally diversified equity portfolio that includes investments in China as part of a broader strategy may be the most prudent approach. Endowus advocates for a disciplined, evidence-based approach to investing, which involves diversifying across a wide range of assets to reduce risk and enhance the odds of investing success. This is particularly pertinent when considering the inclusion of Chinese equities in a portfolio.
If you hold a completely different view of the Chinese market rally, then the best way to express this view is to continue holding a globally diversified equity portfolio that invests in China as part of a greater portfolio.
April market commentary
The US stock market experienced a sharp decline in April, erasing the gains accumulated since the beginning of the year. Initially buoyed by expectations of interest rate cuts by major central banks, including the US Federal Reserve, and hopes for a soft landing of the US economy, investor sentiment soured following economic data that suggested a slowdown in the US economy amid persistent inflationary pressures. This raised concerns that the Federal Reserve might keep interest rates high for longer, leading to a 4% drop in the S&P 500 Index.
Europe also saw a lacklustre performance, with the MSCI Europe Index falling by 1.9% in USD terms. Despite diminishing prospects for U.S. rate cuts, recent data hint at a possible rate cut by the European Central Bank in June, as eurozone inflation remained steady at 2.4% in April, according to Eurostat.
Emerging markets slightly outperformed developed markets, with the MSCI EM Index gaining about 0.5%, compared to a 3.7% decline in the MSCI World Index. This was helped by strong performances in India (2.3%), Turkey (14%), and China (6.6%), in USD terms. Conversely, Japan continued to disappoint in the developed markets, with the MSCI Japan Index dropping by about 4.9% in USD terms and 1.1% in local currency.
In terms of factors, small caps underperformed large caps in most regions, except in emerging markets where EM small caps outperformed large caps by approximately 1.5%. In a shift, growth stocks lagged behind value stocks in developed markets, with the value premium being almost negligible in the US and EM.
In fixed income, April saw a global sell-off in government bonds, led by the US, pushing the 10-year yield to 4.7% as markets adjusted to expectations of persistently high interest rates. However, credit markets fared better, with high yield bonds outperforming investment grade bonds.
Building a long-term resilient portfolio with Endowus Hong Kong
It is almost impossible to predict exactly how macro events would play out. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.
With digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.
Click here to get started on your investing journey with Endowus Hong Kong today.
Read more:
- Why invest through Endowus
- Will China’s economy soar in the Year of Loong?
- All eyes on Japan — Market Insights (February 2024)
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Risk Warnings
Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested.
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