What has happened?
China has bounced! Chinese markets have rallied alongside global risk assets (up ~+25% for November) following a raft of good news coming out of China around the biggest overhangs in the market: 1) de-escalation in US-China tensions; 2) zero-Covid policy; and 3) the property sector crisis. With valuations for MSCI China still close to 20Y lows, it seems the risks for investors are to the upside. It is clear that the economic weakness in China has not gone unnoticed by the regime, judging by the measures announced. Investors are now looking ahead to the Central Economic Work Conference in December as the odds of Beijing announcing further stimulus have risen.
1. US-China relations – a thawing point?
Presidents Joe Biden and Xi Jinping held a face-to-face meeting at the sidelines of the G20 Summit in Bali, Indonesia, where the two leaders said the US and China would resume cooperation in addressing global issues such as climate change and food security. More encouragingly, Biden said that while US policy on Taiwan remains unchanged, he does not expect an imminent invasion of Taiwan by China, and that a new Cold War between the US and China is not necessary. Xi, for his part, spoke on the need for mutual effort to normalise US-China relationship. Even though at present, tensions remain high, the meeting, and the subsequent remarks from the leaders, alleviated concerns in the global market that the two countries were potentially headed towards further clashes. It is not yet clear if the US might soon roll back some of the sanctions that the Biden administration has put on China, including the recent ones designed to severely limit Beijing’s ability to acquire advanced US-made semiconductor technology. It is also worth noting that domestic political drivers in both countries have settled for now, so, it is likely that the near-term focus for Biden and Xi would be on the challenges that their respective economies currently face.
2. Easing Covid restrictions, promising signs of reopening
China has loosened its dynamic Covid policy, in line with our expectations for a gradual re-opening into 2023. Among the measures announced, the most notable ones include a reduction in the number of quarantine days for inbound international travellers, a reduction in PCR testing requirements, and easing the classification of risks, which lowers the pressure on city governments to implement drastic measures and points to a recalibration of the public communication on Covid. While the zero-Covid tolerance remains in place overall, a fresh direction of travel for the policy has been set, following the 20th party congress. These measures could be seen as pushing China towards learning to live with Covid and reduce pressure on cities. However, infection cases are again on the rise, which means the Covid policy will need to be monitored going forward. It is worth noting that China’s re-opening is likely to be a driver of asset prices next year as consumption demand rebounds.
3. Property support, a positive for sentiment but concerns remain
The PBOC and CBIRC jointly issued a 16-point comprehensive rescue plan and advice to second-tier banks on providing funding to China’s troubled property sector – a continuation and escalation of policy support from the banking regulators that started in August. What’s notable here is that direct policy support has now shifted from local governments to the central government, signalling to the market that Beijing is prepared to intervene more thoroughly and directly to stabilise the property sector. As with all measures, the execution of the newly announced ones would be key – whether credit support reaches the distressed developers that need it the most. Overall, the recent measures appear to have been designed to buy time against rising liquidity risks of developers and to mitigate risks within the banking sector. Whilst we do not expect a ’08 style stimulus that might risk further excessive debt growth, support to prevent wider contagion looks set to continue.
Where are earnings and valuations?
Chinese markets have been under immense pressure this year, as has the real economy. Valuations reflect this. International sentiment towards China has been particularly poor. That is reflected in this discount for the MSCI China index vs onshore indices. However, the reality for companies on the ground is better than valuations suggest. Our holdings look set to finish 2022 with earnings growth of around 17%. Consensus earnings growth for the MSCI Onshore index is expected to be 14% for the year, vs 15% for the S&P 500. The power of the opportunity in China really becomes apparent next year, when earnings growth for the S&P 500 is expected to be 6.5%, below the 27% expected for our fund and 19% expected for the onshore index.
Index and Fund earnings growth: Through ‘22 into ‘24 the fund’s earnings per share compound annual growth rate (CPGR) is still >20%
Discrete performance (%)
| 30/09/22 | 30/09/21 | 30/09/20 | 30/09/19 | 30/09/18 | |
|---|---|---|---|---|---|
| Share price | (25.7) | 29.8 | 2.2 | 10.1 | 5.8 |
| NAV | (23.0) | 21.8 | 4.4 | 8.4 | 1.9 |
| Reference Index | (19.4) | 13.7 | 5.7 | 4.1 | 2.4 |
Total return; NAV to NAV, gross income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar.
Important information
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
The Company invests into other funds which themselves invest in assets such as bonds, company shares, cash and currencies. The objectives and risk profiles of these underlying funds may not be fully in line with those of this Company.
Other important information:
The Company is a Closed-ended investment scheme registered pursuant to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended and the Registered Collective Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission.Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at Bow Bells House, 1 Bread Street, London, EC4M 9HH. Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.