Don’t give up on China, portfolio managers say

Despite persistent disappointments, China’s economy is not fundamentally broken, say a couple of portfolio managers who specialize in emerging markets.

In recent months, China has seen falling stock market indexes, record youth unemployment, falling GDP expectations, and flat retail sales as consumers save rather than spend.

But Arup Datta, head of the global quantitative equity team with Mackenzie Investments in Boston, said there are still long-term opportunities for patient investors.

“I’m a contrarian bull when it comes to China. I’m not in the camp that China is entirely broken,” Datta said. “China’s post-Covid malaise has obviously cost us returns, there’s no question about it. But I’m a bit more optimistic, looking forward.”

He said the Chinese government has taken steps to ease demographic pressures, and President Xi Jinping has backed away from the most punishing elements of his “common prosperity” doctrine that limited growth.

“They obviously have technocrats advising the senior Chinese government Communist Party leadership,” he said. “There’s a lot of smart people in China. It’s a well-educated workforce and they should be able to turn things around, so long as the government stays out of the way.”

Meanwhile, Chinese equities are cheap, he said. China’s top-rated companies are selling at less than 10x earnings — half of what U.S. giants typically sell at.

Regina Chi, vice-president and portfolio manager with AGF Investments Inc. in Toronto, paints a similar picture. She said China’s deep morass will likely postpone its ascendency in the global economy — it’s currently the second-largest economy, behind the U.S., and was expected to become number one by 2030 — but a complete economic collapse is highly unlikely.

“I certainly don’t believe that there will be a Lehman moment for China. I don’t believe that China will become the next Japan. There’s not going to be a lost decade,” she said.

Meanwhile, there are plenty of alternatives for investors in other emerging markets.

“It used to be said that when China sneezes, everyone gets a cold. We haven’t seen that this time,” she said.

China’s malaise has been a boon to other emerging economies, Chi said.

“China itself is down 7% [in MSCI USD measures, year-to-date] but Latin America is up almost 26%. Mexico itself is up 29%. Meanwhile, Poland and Hungary are up 25% and 38%, respectively. Taiwan and South Korea are up 13% and 18%, respectively,” she said. “There’s quite a dispersion of returns.”

If China’s economy continues to deteriorate, however, there will be consequences for the broader global market, she said. The IMF has warned that a deepening China slowdown would jeopardize its global GDP forecast, she pointed out.

Chi expects China to use targeted stimulus spending in an attempt to jump-start the economy.

“We’re all looking for that,” she said. “We need to hear about stimulus sooner than later. They need to have a more forceful and definitive plan to boost consumption. The longer this goes on, the harder it will be for the consumer and business confidence to be revived.”

Datta believes China will make steady progress, even if aggressive growth is unlikely in the immediate future.

“If they can grow faster than developed markets, that would be a win for China,” he said. “I’d take 5%. If they can deliver 5% for many years, that market will be a huge buy. The key question is, will the 5% slip to four, to three? We don’t know the answer to that.”