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Invesco's Yang: Why it's time to get back into China

29 June 2022

The manager of the Invesco Asia Trust says there are signs negative sentiment towards the region has already peaked.

By Anthony Luzio,

Editor, Trustnet Magazine

Fiona Yang has gone from an underweight to an overweight position in China in her Invesco Asia Trust, saying that valuations in the country are excessively low considering many of the headwinds that caused the market to crash last year have begun to reverse.

The MSCI China index is down by 34.4% since its peak in February 2021 – and even more in local currency terms – after foreign investors took flight following the government’s heavy-handed intervention in numerous sectors.

Performance of index over 2yrs

Source: FE Analytics

However, Yang’s contrarian instincts were piqued by a forward price-to-earnings (P/E) ratio of 10, compared with 14 from the 10-year average, and a change in attitude from the government.

For example, it has indicated its reform of the tech sector is nearly over, with her colleague William Lam saying the same could be said for the bear market.

“One Chinese analyst put out a report saying Chinese internet stocks were ‘uninvestable’ on a six- to 12-month view, despite at the same time saying that several of these stocks could ‘more than double’ on a three-year timeframe,” he noted.

“That is exactly the sort of sell-side signal we like to see to indicate that sentiment has reached some sort of nadir.”

As a result, Yang has meaningfully increased her exposure to tech giants Alibaba and Tencent.

The crackdown on the tech sector is just one of many reasons why China has fallen over the past year. Its zero-Covid approach and reluctance to use western vaccines meant it has yet to recover from the pandemic and there are doubts that it will be able to hit its 5.5% growth target.

Yet Yang pointed to a package of 33 stimulus measures introduced by the government last month as reason to be more optimistic, and said there is plenty more to come in this department.

“On the monetary and fiscal front, China is at a completely different point compared with developed markets,” she said.

“Post-Covid, China didn't use a lot of monetary tools to help it recover because the export demand was so strong.

“It has a lot of gunpowder that it can use to save the economy, but right now is probably not a great time because of Covid lockdowns – it can't do much stimulus because everyone is staying at home.”

One sector that is expected to benefit from the stimulus measures is real estate. This was also harmed by government interference – in an article published on Trustnet last year, Matthews Asia investment strategist Andy Rothman claimed that the Chinese Communist Party had crashed the property market on purpose, by insisting on more stringent lending requirements for developers, and urging banks to restrict mortgage lending to new home buyers.

This led Evergrande, the country’s second-largest property developer, to default on its debt

“Evergrande’s problems were, in my view, deliberately triggered by government policy in an effort to reduce risks in the financial system associated with the property market and promote consolidation in a very fragmented industry,” said Rothman.

But again, Yang said the aversion to the sector piqued her contrarian instincts, which is why she bought China Overseas Land & Investment, a state-owned enterprise (SOE) property developer.

“China Overseas is not constrained by refinancing because it has a strong balance sheet and is not subject to any of the government regulations on debt raising activities,” she said.

Performance of stock over 1yr

Source: Google Finance

“Our investment thesis was that with the private developers facing these regulatory constraints introduced by the government, they would find it difficult to raise debt to support land acquisition, which would constrain their growth.”

Yang said that China Overseas is already beginning to gain market share and buy stakes in private developers that are facing cash constraints. The stock has been one of the main contributors to her trust’s outperformance this year.

Performance of trust vs sector and index in 2022

Source: FE Analytics

She admitted that risks remain in the real estate sector in the short term, with Covid lockdowns continuing to hit property sales across the country.

“The policy being adopted by China is in sharp contrast to what is happening in the UK,” she continued.

“But it doesn't mean China won’t open up again. I am of the view it will open up close to the party congress in autumn, because once you have political stability, you can focus more on how to address this healthcare issue.”

There are signs that other investors are beginning to return to China – the MSCI China index is up 16.6% over the past month, making it the best-performing major market.

However, this recovery was predicted by Jason Pidcock, manager of the Jupiter Asian Income fund, who said he was happy to be left out of such a market rally as the political situation in China was too unpredictable to invest in.

“I prefer to invest in countries that are ideally democracies, but importantly where there's an independent judiciary,” he said.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.