The chart of the week
The performance of the Chinese market in June can only be described as ‘stand out’ with a 5.7% rise, versus declines of 8.4% for the S&P, 9.1% for the FTSE and 10.9% for the Eurostoxx (all in US Dollars). This is despite never-ending negative press commentary, which has clearly been backward looking.
We believe that the economy has troughed and is bouncing back, with an easing regulatory environment, sizeable monetary & fiscal stimulus, and less restrictive Covid policies. We have again seen further policy measures this week, with the announcement of a $75bn infrastructure investment fund on Tuesday.
We are now beginning to see evidence of the turnaround in the economic data. The just-announced Caixin composite PMI for June reached 55.3, which is the highest reading since the end of 2020 and ahead of consensus expectations.
Valuations in China (trailing price / book ratio) are at multi-year lows as you can see in the below chart, and do not reflect the aforementioned improvements. Hence, we have considered that the risk reward trade-off is extremely favourable and have moved to an overweight position in China our Emerging and Asia funds in recent months. We believe that recent performance is merely the start of a trend.
Furthermore, given the pervading negative sentiment towards Emerging and Asian Markets, and China’s regional dominance both economically and in terms of index weighting, we would expect the resurgence of China to act as a positive catalyst for the entire under-owned asset class. The fact that China is entering an economic upswing when developed markets are moving into a downswing will particularly grab investors’ attention over the coming months, as will the potential easing of tensions with the US.