FirstRand’s Ashburton bullish on China

Ashburton Investments is cautiously optimistic about China’s investment outlook as the country begins to make changes to boost its economy and attract foreign investment. 

Jarred Sullivan, Ashburton’s global multi-asset investment strategist, outlined a few reasons why the asset manager is optimistic about the Chinese economy and what reform it is seeking to boost investor returns. 

One of the major problems with the Chinese economy is its declining population, and it is busy reforming its policies to maintain its large, economically active population. 

However, changing its one-child policy is a long-term strategy that would take years to deliver greater meaningful labour force participation and more robust economic growth rates. 

“What China needs to do in the interim is to encourage skilled immigration, which would boost its labour force and consumer spending and could even assist its troubled property market,” Sullivan said. 

“China lacks a sufficiently resourced and skilled workforce – it’s the greatest structural issue facing its economy. India, on the other hand, is showing healthy growth, and its population has now overtaken China’s.” 

This has resulted in investment flows shifting away from China to India. However, “China is capable of achieving a cyclical recovery, but it needs more robust population growth to improve growth over the long-term.”

The main reasons for China’s poor recent stock performance have been its lacklustre economic recovery from COVID-19 and worsening trade relations with the USA. 

“We have, however, seen more stimulus measures coming through, and there is an upturn in some of China’s economic data,” Sullivan said.  

US-China trade relations have been diverging for years, so Ashburton doesn’t see the further deterioration in relations disturbing China’s economic recovery. 

“Chinese recovery is more about fostering confidence and, instead of putting plasters over a bullet wound, addressing the structural issues hampering recovery.”

Sullivan cautioned that a Trump electoral victory in the US could lead to greater uncertainty and losses, affecting China’s long-term sticky money flows in terms of its recovery. 

“If tariff measures were to be erected, I think it would be difficult for China to structurally recover from it.” 

Internal problems and solutions

A key sector in need of recovery, where low-hanging fruit is available, is the faltering Chinese property sector. 

Sullivan suggested the country recapitalise the sector plagued with debt and prevent property developers from going bankrupt. 

This will, in turn, boost investor confidence in the sector, a major driver of Chinese economic growth. 

Immigration of highly skilled people with strong earning potential will also boost the property sector and the economy.

Sullivan said Ashburton was beginning to see some benefit from the country’s more relaxed monetary policy on the Chinese stock market.

“China has displayed nascent evidence of a rebound in equity market performance recently. We remain encouraged by the front-loading of policy supportive measures at the beginning of this year,” he said. 

“Overall, multiples are generally low in the country, and international investors are generally very underweight in the region.” 

“We remain cautious with our asset allocation sizing toward China but are aware that both investor positioning and multiples historically change rapidly once confidence returns.”

Sullivan said looking at the market strictly from a valuation perspective, China is still very cheap when comparing the current P/E ratio to its previous levels. 

Investors are also encouraged by the news that China has cut its five-year prime lending rate, which should stimulate lending and growth. 

“ It should stimulate the overall economy, including consumer spending, the property market and it could inject more investor confidence about the recovery of the Chinese economy in collaboration with reforms.”