As China moves to liberalise its strict "zero-Covid" policy, the author of these comments argues that a "new cycle" has started in terms of valuations, structural changes and the overall global economy.
As reported earlier this week, China is loosening its zero-Covid regime in a bid to remove shackles from its economy. The controls had sparked widespread protests – challenging the very legitimacy of the Beijing regime only a few weeks after President Xi was re-installed as leader of the Communist Party-run nation.
The changes will allow infected people with mild or no symptoms to quarantine at home; there will no longer be tests for people travelling within the country.
Dato' Seri Cheah Cheng Hye, co-chairman and co-chief investment officer at Value Partners Group, has the following commentary. We are grateful to Value Partners for being able to re-issue these comments. The usual editorial disclaimers apply. Email firstname.lastname@example.org
In recent weeks, we have seen one positive surprise after another from Beijing. It has been faster than expected regarding easing Covid restrictions. In addition, a rescue package for the property market and a positive move in the right direction in terms of the relationship between China and the United States.
In fact, I believe that China has started a new cycle of growth and recovery. At the party congress last month, it was confirmed that economic growth is now China's number one priority. You can see that economic growth is the main solution for many of the challenges faced by China.
We saw panic buying from late October, and many Chinese stocks went up by 20 per cent or more in just the last few weeks. My analysis is that there is now a potential for the Chinese stock market to increase by another 20 per cent to 40 per cent in this new cycle but, having said that, of course I must caution that market behaviour is such that it almost never goes up or down with a straight line. So, there may still be some turbulence ahead. But in general, the direction is looking very positive indeed.
Let's review the key factors, according to the textbook, why markets go up and down and add in a new factor as well. The key factors that determine market direction traditionally have been the direction of the economy, meaning whether corporate earnings and dividends go up and down, the direction of interest rates which determine the price of money, the direction, very importantly, of investment sentiment.
A new factor, of course, will be geopolitics, which in the past wasn't such a big thing, but now can have a direct and immediate impact on market direction. For China, all the above factors have been moving in the right direction at last. In fact, between March 2020 and 2021, all those factors moved in a negative direction for China. We are now seeing a turnaround. This is major and, for the coming year, China is the one economy showing solid growth.
Most forecasts for Chinese growth in 2023, including that from the IMF, is for growth of between 4.5 per cent to 5.1 per cent. In comparison, much of the developed world has entered a slowdown and potential recession.
But China is coming into a new cycle. China can turn around partly because inflationary pressures are low in China, so there is room for stimulus, even some room perhaps for moderate easing of interest rates. And the new property rescue package announced by the Chinese government assures a soft landing for the troubled property sector.
Geopolitical tensions have been reduced by the recent meeting between President Biden and President Xi. In Bali, the United States told the media that it is not seeking a confrontation with China. And despite all that, Chinese stocks, despite the recent rally, remain at rock bottom valuations that we last saw during the Global Financial Crisis of 2008. So, you can see why people like me, who have been following China since the 1980s, are pretty optimistic.
Now I think it is also important to put China in the global context [to understand] how it looks for the global investor. The world that my generation of investors knows has changed a lot because we're used to a world where the US-dominated and provided an umbrella for a sense of security and safety. We investors only needed to focus on investing in business and commerce. And we could let political leaders and military generals take care of the geopolitics, but that's not true any more.
Global order has broken down; we have been swept by social unrest, financialisation, inflation, war, etc. Even climate change. We're seeing the weaponisation of trade, money, food supplies, and even human talent. So I think the prevailing investment approach of the last, maybe 25 years, with Fear Of Missing Out, doesn't really work anymore.
The FOMO approach almost guarantees that investors will be “whipsawed,” because markets have become so volatile and so unpredictable, and the central bank “put” – meaning the expectation of central banks coming to the rescue of markets at each and every crisis. Frankly, central banks have run out of room to implement such rescue packages, with the exception of a few countries such as China. We have enjoyed too long a period of easy money, almost free money, negative interest rates. The amount of money printed since 1996 has increased several times the size of the real economy. There's very little room there, and it has become a very fragile situation of over-financialization and rising inflation.
How do you survive the challenging environment for global investors? I will argue that you survive by identifying long-term durable themes for investing; themes that allow you to ride out the roller-coaster swings to the market, where almost every prediction can be proven right or wrong. What you want is a solid, durable investment theme that allows you to hold on to the conviction and eventually allows you to preserve your wealth and pass it from one generation to another. I believe it's up to each investor to figure out what their preferred long-term theme is. But the key is that you must be in a situation where you can avoid the risks of buying high and selling low.
For me, examples of long-term themes will include energy assets, food assets, and key commodities, including copper and lithium, defence stocks because the world is getting increasingly uncertain. And one of my favourite themes is Chinese stocks and bonds. China has simply become too big to ignore, and the key to sustainable investing, in my view, is to find a sustainable society that can withstand this era of huge social, global, monetary and financial disorder throughout our planet.
In China, there is a foundation of sustainability and a large and growing middle class. China’s middle class today of 400 million people is larger than the population of the US, and it is growing very fast. Chinese middle-class people are likely to number 800 million or so by the end of the decade. This is a very solid foundation of an inclusive society that people buy into. And that allows the country to provide its own huge domestic market for innovation, manufacturing, and distribution. It is a self-contained continental economy that I think provides a high chance of sustainability which I believe is key to wealth preservation.
There are very significant changes going on in China in terms of how people save and invest their savings, and this is really the world's largest pool of savings. The 25-year addiction of the Chinese public to buying property is beginning to fade away. This is something that's happened only since Covid started so many people don't realise this, but Chinese household wealth used to be more than 50 per cent represented by just one asset class. Real estate today is more like 37 per cent.
Meanwhile, the percentage of household assets allocated to capital market products, to professionally managed funds has risen to 13 per cent from just above zero a generation ago.
Chinese people have discovered the value of investing in the capital market. And this is something that the Chinese government is nurturing, this relocation of savings and wealth because the property market is over-invested, and it was actually a bubble, and it was no longer very productive. Eighty per cent of Chinese households in the cities already own one or more properties. So, China wants to redirect savings to productive investments, especially innovation, green energy, and manufacturing. And it is happening.
Why we are excited, of course, is that it means there is a lot of new money waiting to enter the stock market and support share prices and valuations, all from the Chinese mainland. At the same time, there's a supply of new ideas and new initiatives.
A lot of Chinese companies are choosing to IPO in Shanghai, Shenzhen, and Beijing – the mainland domestic markets. This assures a lot of new opportunities for the public to enjoy investing their savings, again moving away from the property market. So, overall, we are quite confident to say that a new economic cycle has started in terms of structural changes, valuations, sentiment, and the overall global economy. I think China is entering a new era. It is the turn of Chinese stocks to shine.
About the author
Dato’ Seri Cheah has been in charge of Value Partners since he co-founded the firm in February 1993 with his partner, V-Nee Yeh. Throughout the 1990s, he held the position of chief investment officer and MD of Value Partners, responsible for managing both the firm’s funds and business operation. He led Value Partners to a listing on the Main Board of the Hong Kong Stock Exchange in 2007.