(News Bulletin 247) – Since February, Chinese financial markets have rebounded significantly. Asset manager Robeco gives his analysis of this recovery and delivers his convictions to position himself for the long term.

After a particularly trying year in 2023, the stock markets of mainland China and Hong Kong are regaining color.

Since February, the Hang Seng, the main index of Hong Kong, has gained more than 19% while the CSI 300 (index which brings together the 300 largest companies listed on the stock exchange in Shanghai and Shenzhen) has advanced for its part. by 13%. A rebound due to scrappy valuations but also to reassuring economic indicators.

China’s GDP growth in the first quarter exceeded market expectations at 5.3% year-on-year, supported by exports and investments in the new energy sector. Industrial production increased by 6.1% year-on-year, accounting for 37% of total GDP growth during the quarter, when the April manufacturing PMIs pleasantly surprised the markets.

A favorable cocktail

Investors therefore seem to be putting China back on their radar, becoming more positive about the country’s economic prospects. The asset manager Robeco, for its part, did not wait to position itself in China.

At the end of 2023, the asset manager indicated in his 2024 forecasts for China that he was favorable to Chinese stocks “as part of a long-term investment strategy”, with one nuance, however, since he believed that the Middle Kingdom “needs budgetary firepower to revive actions”.

Robeco looks back at the elements that contributed to this clear rebound in Chinese stocks since February. In addition to encouraging economic statistics that support this movement, the asset manager also notes a geographic rotation in favor of Chinese stocks. “The recovery is influenced by broader global and regional diversification away from geopolitical uncertainty and increasing volatility in the US and Japanese markets,” he says.

The asset manager also recalls the Chinese Communist Party’s latest measures in favor of supply, with projects aimed at developing a national strategy to support technological innovation.

Also, the Chinese Communist Party appears to be moving towards new measures to resolve the real estate crisis, “with indications that there would be an easing of restrictions and increased support for developers.”

“If implemented correctly, these measures could improve property sales and stabilize housing prices,” says Robeco.

Development of capital markets

Robeco also cites efforts by Chinese policymakers to stabilize the stock market. The financial intermediary points out that the Chinese State Council has issued nine articles aimed at promoting quality development in China’s capital market.

“These articles call in particular for better visibility and better returns for shareholders, improving the rules relating to the reduction of shareholdings and strengthening the monitoring of cash dividends,” he continues.

Robeco has seen a significant increase in share buyback plans, both in number and value this year, while dividends have shown an upward trend in recent years. Developments which, according to the asset manager, indicate that companies are placing more emphasis on improving total shareholder returns.

A barbell strategy

To make the most of the recovery of these stocks in a long-term perspective, Robceco is adopting a “selective” strategy.

“Current cheap valuations, combined with the prospect of stabilizing economic growth and a recovery in corporate profits, encourage us to be constructive on Chinese stocks,” says asset manager

With this in mind, Robeco says it overweights discretionary consumer stocks (non-essential goods and services, editor’s note), and industrial stocks.

The strategy detailed by Robeco thus translates into a “barbell” positioning, which on the one hand places emphasis on cyclical values. These include cheaper stocks likely to rebound in the short term, as well as dividend stocks such as utilities and appliances.

And on the other hand, the asset manager adds that he invests in securities that he considers long-term structural winners: in particular, companies benefiting from technological innovation, internet modernization and industry, many of which are targeting growth overseas.

“Over the coming months, we will closely monitor the effectiveness of policy implementation, as well as signs of economic stabilization and recovery in corporate earnings revisions. We are confident that quality stocks at long term on which we are positioned are likely to outperform Bottom-up selection is essential”, suggests Robeco.