Is China uninvestable or misunderstood? The INVESTING ANALYST

Daily Mail​

15 hours ago

After years plagued with economic issues, escalating geopolitical tensions and weak investor sentiment, is China's recent recovery an indication of brighter years ahead?
In this column, Josef Licsauer, Investment trust research analyst at Kepler Partners, explains why China could offer an opportunity for investors.
There was a time when China felt unstoppable.
After joining the World Trade Organization in 2001, it quickly became the world's factory floor, driving globalisation, ramping up exports, and fuelling a commodities supercycle with massive investment in infrastructure and real estate.
Between 2000 and 2010, its GDP grew by an average of 10.6 per cent, enriching emerging markets and powering global growth.
But that once-compelling growth story has since lost its shine.
In the decade that followed, momentum cooled as China tried to rebalance its economy away from exports and infrastructure toward domestic consumption.
Rising debt, industrial overcapacity and an ageing population began to weigh on the long-term outlook, even as headline GDP remained relatively strong.
A brief rally in 2021 offered some hope, but it was short-lived. Strict lockdowns, a spiralling property crisis, tech crackdowns, and rising tensions with the West reasserted themselves, knocking investor confidence and sending sentiment into retreat.
Since then, Chinese equity valuations have slumped to near historic lows and the country's index weighting has fallen from a peak of around 40 per cent to the low 20s.
But amid the disruption, opportunity is stirring. Valuations remain deeply discounted, stimulus is gaining traction, and internal growth drivers – from tech innovation and AI to rising healthcare demand and a push for self-sufficiency – are beginning to reassert themselves.
For investors willing to look again, investment trusts may offer one of the most effective routes back into China.
Return of the King (Consumer)
Just as The Return of the King brought Tolkien's epic Lord of the Rings trilogy to a triumphant close, and found a surprisingly devoted fanbase in China during its 2021 re-release, the consumer may now be stepping back into the spotlight in China's economic narrative.
While confidence remains fragile, early signs of recovery are visible in rising footfall, discretionary spending, and experience-led consumption.
A key driver? The $10trillion surge in household savings since 2020, a staggering sum exceeding the GDP of Japan or Germany.
As confidence continues to improve, that pool of capital could fuel a powerful cycle of consumption, hiring and reinvestment.
We're already seeing early evidence. Guming, a fast-growing teahouse chain, has seen its share price surge over 160 per cent since listing earlier this year on the back of consumers returning to the city and spending again.
Similarly, Haidilao, the hotpot giant, is benefitting from renewed appetite for social dining post-Covid, Luckin Coffee continues to dominate value-focused caffeine and for affluent consumers, and premium names like Kweichow Moutai remain in high-demand.
JPMorgan China Growth & Income (JCGI) has tapped into these trends with a portfolio tilted toward domestic-facing names.
The managers added Guming at IPO and have recently increased positions in other domestic-facing names they believe will benefit from experience-led recovery.
The opportunity, they argue, lies not in exports, but in China's internal engine.
Baillie Gifford China Growth Trust (BGCG) shares this domestic tilt and a focus that has supported its outperformance of the MSCI China All-Share Index over the past year. Managers Sophie Earnshaw and Linda Lin are targeting areas supported by stimulus and policy, alongside firms driving innovation in manufacturing and high-end tech.
On the consumer front, core holdings like Luckin Coffee and Kweichow Moutai reflect their belief these businesses are central to China's long-term transformation.
Policy support and stimulus
The Chinese government unveiled a wave of targeted support in September 2024, aimed at stabilising the property sector, boosting consumption and accelerating high-priority industries like AI, semiconductors and green tech.
The stimulus package was worth up to 7.5trillion yuan (around $1.07trillion), potentially the largest in the country's history in nominal terms, according to Deutsche Bank.
The measures, designed to shore up confidence in key areas of the economy, included mortgage relief, stock market support, local government bond issuance, and capital injections into state-owned banks.
The message is clear: policymakers are committed to restoring confidence and lifting domestic growth.
Fidelity Asian Values (FAS) is one trust with exposure here. Managers Nitin Bajaj and Ajinkya Dhavale have reduced exposure to India, where they now see stretched valuations and reallocated capital into undervalued Chinese companies tied to domestic demand.
Despite ongoing geopolitical and macro risks, they see 'caged upside': long-term growth potential yet to be realised in undervalued, well-capitalised, well-run businesses with limited exposure to global trade volatility.
One example is Full Truck Alliance, China's leading digital freight broker, which plays a pivotal role in modernising the country's logistics network.
FAS remains overweight China and the managers believe that the brief sentiment rally of late 2024, triggered by stimulus, could repeat.
With substantial capital still on the sidelines, a sustained improvement in earnings could spark a meaningful rebound.
For those after a more balanced approach, JPMorgan Global Emerging Markets (JMG) maintains a neutral China weighting but within that holds select domestic-facing stocks that could benefit from stimulus tailwinds.
It's another way to stay exposed to China's upside potential while remaining diversified across the broader EM landscape.
Innovation and independence
China's drive for technological self-sufficiency is another area drawing investor interest. With geopolitical tensions rising, the country is accelerating efforts in AI, software, advanced manufacturing and supply chain independence, all backed by targeted policy support.
It's a long game, but one that could help reduce reliance on foreign tech and reshape the country's economic future.
The launch of DeepSeek's AI model – viewed by many as China's answer to ChatGPT – reignited interest in alternative, homegrown productivity-enhancing technologies.
These companies may not yet rival US giants, but they're evolving fast, and often trade at a fraction of the price. Some are even partnering with or supporting global leaders like Nvidia, reinforcing their growing relevance.
JCGI has recently increased exposure to names aligned with this theme, including Kingsoft, a leader in office software and cloud computing. Baillie Gifford China Growth (BGCG) is following a similar path, uncovering value in firms like Horizon Robotics, which develops AI chips for autonomous vehicles and smart cities, and industrial champions like CATL and BYD, leaders in the EVs and battery tech.
For long-term investors, China's innovation drive could offer a multi-year growth runway. And with valuations near historic lows, it's fertile ground for active investors to uncover pricing anomalies and compelling entry points.
The trusts highlighted in this piece are all trading on discounts wider than their five-year averages, except for JMG, which is slightly narrower than its historical average but still wider than the Global Emerging Markets sector overall.
For investors, that could represent a double discount opportunity: accessing undervalued Chinese companies via investment trusts that are themselves trading at wider discounts relative to their long-term norms.
The playbook has changed
China's potential comes with caveats. Sentiment is fragile, and risks – from regulatory shifts to US trade restrictions – loom large. Confidence, especially among global investors, won't return overnight. But that's precisely why I think valuations look attractive.
Many high-quality businesses with strong fundamentals are trading at multi-year lows. Some deserve their discounts, but others have been swept up in broad-based pessimism and macro-driven sell-offs.
China continues to divide opinion. Some see structural decline; others, temporary growing pains. The reality is likely somewhere in between.
What is clear is that yesterday's playbook no longer fits, but for selective, long-term investors willing to look past the short-term noise, the long-term case is quietly rebuilding.
I'm not advocating a full-scale pivot. But with the world's second-largest economy priced for pessimism, having no exposure at all could prove just as risky, especially if sentiment quickly turns. Sometimes, the most compelling opportunities are the ones that feel the most uncomfortable.