Tantalising Timing

Fund comment: tantalising timing 


After a brutal end to 2018, China’s stock market has been one of the most attractive places to invest in so far this year. Stocks became extremely cheap amidst ongoing trade tensions with the US and a wave of weakening macroeconomic data releases, but valuations for many names remain relatively attractive by global and historical standards. Considering the Chinese New Year celebrations earlier this month for the Year of the Pig, we thought it made sense to discuss the changing backdrop in China.

Even though China’s economy is growing more slowly, it still is expected to expand by 6% in 2019 which stands out from other major economies around the world today. Opportunities exist across different sectors and we see many valuations that currently do not reflect the fundamentals of many companies or the aspirational domestic customer base that they cater to. In addition, these lower valuations offer considerable downside protection, which is more appealing compared to elevated valuations in the US, for example, which pose a higher risk of de-rating. Rallies are now spreading across Asia, since emerging market stocks tend to be driven by how China is faring and the dollar is unlikely to strengthen, and we are witnessing some considerable gains as a result. As the chart below shows, Asia (including China) is trading at about a 40% discount to the US on a price-to-earnings basis and offers a yield premium of 60% compared to the US.

Source: Morningstar Direct as 31/01/19.

Shift from investment to consumption

The Chinese government committed itself to a significant amount of infrastructure investment after the financial crisis, and that continues to pay off, for example, with the creation of more technologically advanced trains. The economic boom continues to spread with every new track that is laid – China’s own train expansion over the past decade has more than doubled the total amount of high-speed tracks worldwide.

Domestic tourism and consumption have become the leading drivers of economic growth and last month China’s Ministry of Commerce said it expects consumer spending to rise by around 9% in 2019. As well, the Chinese government revealed plans to boost the power of its mass consumer market in the form of tax cuts and other measures aimed at boosting household income.

As China shifts its growth model to one more focused on domestic consumption it is also interesting to see how dominant Chinese companies are becoming and how this could help protect its economy from the increasing amount of global market disruptions. It is telling that China spent nearly nothing on research and development (R&D) in 2000 but in 2017 alone invested US$412 billion, which is nearly on par with the US and far surpassed Japan, the UK and Germany. Chinese companies accounted for about a third of all global telecom patent applications in 2017 and, with no end in sight to the trade war, China’s mission to create a sustainable economic model will remain one to watch.

Source: World Bank, latest available data.

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments can fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). 

Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

CLI01372 Expiry 03/31/19.

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