China bulls betting big on recovery play as stocks rally

Money managers are more bullish on China as the Asian powerhouse gears up for growth, with Chinese equities surging on the turnaround in sentiment.

Investors are piling into Chinese equities as the Asian powerhouse gears up for growth. Picture: AFP

Money managers are more bullish on China as the Asian powerhouse gears up for growth, with Chinese equities surging on the turnaround in sentiment.

Having hit lows in late October, Chinese stocks have bounced strongly, driven by the country’s move to abandon its strict Covid-19 health controls and an easing of regulatory crackdowns.

Despite the sharemarket recovery, many sectors are still attractive with valuations well off their 2021 peaks, according to Asia-focused fund managers.

The technology and gaming sectors are among the top picks for Maple-Brown Abbott portfolio manager Will Main.

“We think a number of the internet names are likely to do well. You’ve obviously got overall demand coming back following what was a pretty tough period, with earnings estimates being cut over the last 18 months or so,” Mr Main said. “You’ve also had some resolution on the regulatory crackdown … and investigations that are being wrapped up or, indeed, in the online gaming space or industry you’ve seen that recommencement of licensing that was suspended for a period. That’s continued to come through.

“The companies themselves have had a real cost-cutting focus over the last 12 months,” he said. “As the economy turns, you’ll see the top line start to really accelerate and I think that you’re going to get real operational leverage and some very solid earnings growth coming out of that.”

Mr Main, who runs Maple Brown Abbott’s Asian Investment Trust alongside Geoffrey Bazzan, said the fund bought into the market weakness in 2022, leaving it in a position to benefit from a recovery. Even with the jump in recent weeks, stocks were about 40 per cent off their 2021 highs, he said.

“Certainly sentiment has changed from what was incredibly bearish and pessimistic to something more positive now. And there are plenty of stocks that are reopening plays – the challenge is finding the ones that are going to go up the most,” he said.

China’s technology and gaming sectors are among the top picks for Maple-Brown Abbott portfolio manager Will Main. Picture: AFP

Chinese entertainment giant Tencent was among the fund’s top five holdings as at December 31. The stock, along with e-commerce heavyweight Alibaba, has made double-digits gains since the start of the month as investors bet big on the recovery. While financials should “do okay” this year, Mr Main sees better opportunities elsewhere, and is tipping a period of “revenge spending” in the months ahead as consumer sentiment recovers.

His fund has outperformed its benchmark over both the short and long term, returning 10.7 per cent over the three months to December 31, compared to the benchmark’s 5.6 per cent. Over three years it returned 1 per cent against the index’s -0.3 per cent.

For Platinum Asia Fund stockpicker Cameron Robertson, Chinese equities are not expensive even after the recent rally – with the economic outlook “reasonably good” and a lot of room for investors to come back in. The fund is looking to add to its China positions as opportunities come up but it’s also taking profits following the recent rally.

“Tech stocks have had a big rally, and so have some of the travel-related companies as well, including the likes of Trip.com,” Mr Robertson said. “There’s a few … where we’ve made really good money, and we’ve been reducing those exposures a little bit to redeploy the capital elsewhere – sometimes in China, sometimes in other markets.”

Ping An Insurance is another company the fund holds but has taken some profits in of late. And the same goes for Alibaba and Tencent, Mr Robertson said.

Recent additions, meanwhile, include Longshine Technology, which provides software and IT services for the power industry. Like others, Mr Robertson is bullish on the outlook for China, although he is expecting ups and downs as the economy reopens.

“Broadly speaking, (the Chinese economy) is coming back. Investors haven’t been there, people have been scared to touch (China), they were calling it uninvestable. So I think there’s probably a reasonable way for that market to go,” he said.

Alongside a bullish tone on China, the Platinum Asia Fund has also increased its exposure to Korea in recent months.

“Korea overall is a market that trades on fairly low valuations, and there‘s a couple of reasons for that, including that historically, people were a bit worried that protections weren’t as good (for investors) as you might see in some of the markets.

“But in recent years, there’s been a number of regulatory changes, which we think actually help support minority investors a lot. So we’re quite positive about the environment for investing in Korea more broadly.”

It’s not just the smart money piling into Chinese equities: passive funds are recording similar trends. Since the start of January, local ETF provider BetaShares has seen renewed interest in its BetaShares Asian Technology Tigers ETF. The fund this month saw its first inflows since May – and, at $8.5m, the largest inflows since August 2021. The ETF’s funds under management have also bounced back above $500m for the first time in a year.

Andrew Swan, who worked in Asia for more than 20 years, including with BlackRock and JPMorgan, before relocating to Australia in 2020, is another fundie bullish on China’s outlook – but with a more selective bias.

Mr Swan is now head of Asia (ex-Japan) equities at Man GLG, with the money manager launching the Man GLG Asia Opportunities Fund in October. After being negative on Asia for the past couple of years, Mr Swan said this shifted to a more positive outlook about six months ago.

The fund’s stockpicking process is based primarily on earnings revisions and buying into companies before the rest of the market sees the earnings upturn.

“We try to own companies that we think will do better than the market is anticipating from an earnings point of view. And so that really dictates pretty much everything we do,” Mr Swan said.

“We could see that into 2023 the China would have to open up, given how weak the economy was and just the way the virus had moved. We felt that the turning point was coming for how they were approaching Covid. So we’ve been positioning for that opening since last August.”

But while he is optimistic on China, Mr Swan doesn’t see as broad a recovery as others. “We feel that China’s a little bit different in that the excess savings that are in the system aren’t as significant as … in the West,” he said.