The recent data emerging from China has worried investors: retail sales, industrial production and fixed asset production have all missed targets. The country tipped into deflation in July and there are ongoing concerns over the property sector and bad debts.
The result has been real weakness in Chinese stock markets since the start of the year. Elizabeth Kwik, manager of abrdn China Investment Company Limited, says, “The macroeconomic situation is concerning investors. The market has been disappointed with the pace of recovery since the reopening. People were initially expecting a V-shaped rebound and that has not been the case.” This is also worrying for the rest of Asia. China has been an engine of growth for the wider region, with countries such as Thailand particularly exposed to China reopening.
However, the gloom may have been exaggerated. Even if data has come in below expectations, it is showing growth. Elizabeth says, “Although the recovery has not been as quick as hoped, it doesn't mean there is no growth or opportunity. The recovery in services is underway and there has been a pick-up in retail sales. This should broaden out to the rest of the economy as the savings rate normalizes – it is still very high. It's a question of rebuilding consumer confidence.”
“It’s a question of rebuilding consumer confidence.”
Elizabeth believes that policy support will emerge to support the economy. The central bank is already starting to ease policy. It has the scope to do this because China is not struggling with the same inflationary problems that are hurting other large economies. She adds, “There is a lot of headroom for policy easing. The central bank is looking to do this more actively in second half of year. Local governments are yet to hit their loan quotas.”
Elsewhere, there are few signs that the region is struggling in the face of China's weakness. Gabriel Sacks, manager of abrdn Asia Focus plc, points out that some countries may even be beneficiaries. He says, “When we talk to companies in India, they reference the China plus one strategy opportunity. A lot of countries are looking to benefit from that reconfiguring of supply chains away from China. We see Vietnam and Indonesia benefiting in particular.”
He adds, “Based on recent consumer surveys, only 11% of people in the UK feel positive about the economic outlook. In India, only 2% of people of people feel pessimistic. Even in China where there's a lot of negative noise and a tough economic backdrop, it's about 50/50. We also see this positivity when we speak to companies. Inflation has surprised on the downside. That positions Asia better, and once interest rates start to come down in the West, you'll see that happen in Asia as well. There is a good outlook for growth even if China grows more slowly.”
For investors, the negative sentiment surrounding China has pushed valuations lower. Elizabeth says, “Valuations are undemanding. Company earnings have not been downgraded as much as share prices would suggest.” Therefore, we believe in adding to China due to the compelling valuations being offered.
We also believe in being bullish on India, but caution against jumping in at this point – even while India appears to be firing on all cylinders. Prime Minister Modi recently had a successful visit with President Biden, the economy is strong, and the corporate sector is buoyant. Therefore, valuations may appear to be too high, in some cases. Gabriel adds, “It is still our largest country weighting, but we’re trying to hold back our excitement because it's consensus. Indian small caps have more than doubled over last three years, China, on the other hand, has gone the other way.”
Regardless of the economic situation, the region is still tapped into a range of growth opportunities, such as rapid adoption of technology through areas like cybersecurity, e-commerce, data centers, and its move to net zero through renewable energy, electric vehicles, and battery storage.
Gabriel goes on to add that he has been looking at leaders in the technology supply chain who may be supplying what he calls “behemoths.” Healthcare has been another important part of the portfolio, particularly in India where spending is very low, but growing fast. However, we believe the most important theme is domestic consumption growth, which remains a powerful long-term trend across the region.
China's reopening may not have gone to plan, but investors shouldn't be deterred.
China's economic weakness should not obscure the opportunities across Asia, including within China itself. At the same time, weak sentiment has left valuations appealing, meaning investors may be getting access to growth themes at a lower cost. China's reopening may not have gone to plan, but investors shouldn't be deterred.