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Could China's bull market be awakening?

Writer's picture: Royce AdvisoryRoyce Advisory

While many investors are fleeing Chinese equities, seasoned market watchers are sensing a seismic shift. Could the world's second-largest economy be on the cusp of a multi-year bull run, offering astute investors a chance to capitalize on deeply discounted valuations?


As global markets grapple with uncertainty, China's stock market has been battered by a perfect storm of headwinds. Yet, beneath the surface, powerful forces are aligning that could ignite a remarkable turnaround.


Below we explore the key factors that point to a potential bull market in Chinese equities and why contrarian investors are starting to take notice.



Valuation Reset: From Bubble to Bargain


The Chinese stock market has undergone a dramatic valuation reset over the past 17 years. From trading at a lofty 8 times book value in 2007, Chinese equities have plummeted to historically low levels. The Shiller price-to-earnings ratio for Chinese stocks has collapsed from 55 times to just 10 times.


This correction has set the stage for a potential recovery. As legendary investor Jeremy Grantham wisely observed, "The market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before."



The Beijing Put: Government Support for Equity Markets


China's leadership has made it clear that reviving the stock market is now a key policy objective. The Politburo, China's top decision-making body, has explicitly stated its intention to boost stock prices and increase investor confidence. This "Beijing Put" echoes the supportive stance taken by the Federal Reserve during past U.S. market downturns.


Key measures include:


  • Reduction of transaction fees and stamp duty on stock trades

  • Loosening of margin requirements

  • Encouragement of institutional investors to increase equity allocations

  • Potential establishment of a state-backed market stabilization fund


Household Savings: Dry Powder for a Market Rally


Chinese households have amassed an astounding $7.4 trillion in additional savings since 2020. This vast pool of capital, equivalent to the combined GDP of Germany and Japan, represents significant potential firepower for equity markets.


As confidence returns and the "wealth effect" takes hold, a shift from property investment to stocks could fuel a sustained bull run. According to CLSA, cumulative flows into financial markets from Chinese households may exceed $18 trillion by 2030.



Contrarian Sentiment: When the Crowd Flees, Opportunity Knocks


Betting against Chinese stocks remains one of the most crowded trades globally, according to Bank of America's fund manager survey. This extreme pessimism often precedes major market turning points.


As John Kenneth Galbraith famously noted, "There can be few fields of human endeavor in which history counts for so little as in the world of finance." When sentiment reaches rock bottom, the stage is set for a powerful reversal.


Policy Shift: From Crackdown to Support


After years of regulatory tightening, Chinese authorities are signaling a more supportive stance towards key sectors like technology and real estate. Premier Li Qiang has praised internet companies as "trailblazers of the era," marking a stark contrast to previous rhetoric.


This policy pivot could reignite investor interest in beaten-down sectors that still offer tremendous growth potential.



Demographic Dividend: Millennials Embrace Equity Culture


China's 400 million-strong millennial generation is increasingly looking beyond real estate for wealth creation. As property markets stagnate, stocks are becoming an attractive alternative for this tech-savvy cohort.


A cultural shift towards equity investing could provide a long-term tailwind for Chinese stock markets, similar to the retail investing boom seen in the U.S. in recent years.



Global Diversification: China's Role in Balanced Portfolios


For global investors, Chinese equities offer a compelling diversification opportunity. With correlations to developed markets at multi-year lows, adding exposure to China can potentially enhance risk-adjusted returns for balanced portfolios.


As China's weight in global indices increases, institutional investors may be compelled to increase their allocations, providing further support to the market.



DISCLAIMER


Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.


This communication is based on information from sources believed to be reliable at the time of its preparation (July 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

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