October 2024, From the Field -
A strong September rally propelled China from a laggard to become the best-performing major equity market for the nine months to September 30, 2024, in turn helping to drive the emerging market (EM) indices onward and upward. The market has given back some of these gains following its reopening on October 8 after the Golden Week holiday. In a clear policy pivot, the central government and, importantly, the leaders of China, have changed their approach and demonstrated a willingness to support the economy AND the stock market. The initial response rally in China stocks was extreme.
Following the market’s sharp rerating, we expect future performance will be driven by earnings growth. What investors must decide is whether, after a number of false dawns in the past 18 months, China is really changing. Is the leadership focused on the economy and the markets? Can the world put the “China is uninvestable” thesis to rest?
An array of policy announcements have come out over the past weeks, ranging in scope and nature. At the highest level, they fall into four buckets: (i) fiscal stimulus, (ii) monetary easing, (iii) housing market support, and (iv) stock market support. While investors continue to fixate over the size of the expected fiscal support package and the effectiveness of the proposed property de-stocking scheme, the key takeaway is that the central government, and specifically President Xi Jinping, have shown that they care about the economy.
China’s leaders have recognized that the economy is faltering and that allowing deflation to take hold is dangerous in a country with a relatively high debt burden. Measures are needed to inject confidence into the economy to spur consumers and corporates to spend. To us, this is the key message—China is no longer “uninvestable,” if indeed it ever was. Beijing is prepared to support sectors, companies, households, and, importantly, the stock market. There is now a strong policy put in place, and any further bad economic news is likely to be met with a further policy response.
A market that was widely shunned had fallen close to two standard deviations cheap relative to its 10-year history (MSCI China Index). After three years of almost exclusively bad news, the good news was met with a very rapid response from Chinese investors who had (rightly) taken their chips off the China table. The market was cheap, and positioning was light.
Investors wanted China exposure after the policy announcements and flocked back to the market. The week ended October 9 saw unprecedented inflows into EM equities of almost USD 41 billion, the highest weekly inflow since flow data tracking began in 2000. These flows were almost exclusively into exchange-traded funds. International investors wanted beta, which meant China's mega-caps caught the bid.
The initial rerating has seen valuations move back toward their historic averages. China does, however, remain at a significant discount to the U.S.-dominated MSCI World Index, even after the rally. Volatility will likely persist in the near term as investors continue to focus on the nature of the next policy announcement from Beijing and whether the fiscal package overall is of sufficient size to move the needle on growth. All eyes are on the next National People's Congress standing committee meeting, which will be held in late October/early November for further clues on fiscal stimulus.
We don’t have strong conviction that China's economy will completely reverse course. But at the very least, it should stabilize going forward. Things will stop getting worse. A similar story played out in 2015. Back then, the policy response took time to turn the economy around as the effects of fiscal and monetary policies always come with a lag. However, while it took roughly four quarters for the economy to turn, markets front ran the improvement. Once this initial phase of volatility passes, we believe the market will be driven by fundamentals and focus will switch to earnings growth rather than economic growth. Our China portfolio managers are in agreement that the macro outlook for China in 2025 has significantly improved.
Expertise is required to navigate the rapid changes in the market environment. At T. Rowe Price Associates, Inc., we're focused on navigating these disruptive environments responsibly. We have made one of the largest commitments in the industry to fundamental research, including a global network of analysts, sector portfolio managers, and diversified and regional portfolio managers who collaborate, share ideas, and challenge each other to help us achieve better outcomes for our clients. We believe their relationships with companies and understanding of the dynamics of their sector create a long-term competitive advantage when choosing stocks. Their research is shared with investment professionals across the platform, as we believe that this helps generate stronger investment conviction.
Robert Secker is a portfolio specialist representing the firm's emerging markets, Asian, and Chinese equity strategies to clients, consultants, and prospects in the Equity Division. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.
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