(News Bulletin 247) – The series of recovery measures announced by China last week, according to Janus Henderson, mark the transition from debt control to supporting growth. This paradigm shift could be the catalyst needed to restore confidence and unlock value in Chinese markets, the management company believes.

Last week, China announced a series of measures intended to support the economy and achieve the growth target of 5% in 2024. The urgency of reviving the real estate sector, in decline for three years, was underlined by Chinese power.

The stock markets were not indifferent to the announcement of these various stimulus measures. Including the main ones concerned, namely the Chinese markets. The CSI 300 – which brings together the largest capitalizations on the Shenzhen and Shanghai stock exchanges – jumped 16% in one week, its strongest weekly increase since 2008, recalls Victoria Mio, head of China equities at Janus Henderson.

Sectors that are very dependent on the Chinese economy, such as luxury or spirits, were also supported by these Chinese announcements.

“After the policy announcement, the general mood of investors shifted from skepticism to optimism, as they expected the measures to support economic growth and could potentially lead to a sustained market recovery,” notes Victoria Mio.

This time might be different

This is not China’s first attempt. The country’s authorities had already announced recovery measures last April with the issuance of special long-term government bonds. But they “failed to create lasting momentum”, recalls Victoria Mio. However, the specialist believes that this time there are “convincing reasons” to believe that these measures will work.

The specialist cites a more favorable external environment, and in this regard mentions the reduction in interest rates by the American Federal Reserve in September. According to Janus Henderson, this easing created a more favorable environment for Chinese policymakers to implement stimulus measures, “thus reducing fears of capital flight or currency devaluation.”

Regarding China more specifically, the deterioration of consumption and the market reached such a stage, according to Victoria Mio, that policymakers considered it necessary to take decisive measures. “This urgency is evident in view of the delayed meeting of the Politburo (last week) and the unusually explicit language used in general policy declarations,” says the specialist.

“Unlike previous initiatives, the measures address not only monetary policy, but also challenges in the real estate sector, stock market stability and consumer confidence. Further measures could be announced in the coming weeks,” she continues.

What implications for investors?

For Janus Henderson, this policy change initiated by China will highlight some key elements for investors to take into account.

The management company sees opportunities in terms of valuation, with Chinese stocks currently trading at attractive prices. She recalls that the MSCI China index displays a 12-month price-to-earnings ratio of around 10.3 (as of September 30, 2024), “which makes it one of the cheapest markets in the world”.

“It is therefore a unique entry point for investors looking for yield in a market with substantial growth potential,” says Janus Henderson.

Also, China’s low correlation with other global markets, particularly during periods of global market volatility, is an asset for the management company, and “makes it an excellent diversification option for investors.”

“With the expected new fiscal stimulus measures, China could potentially outperform other developed and emerging markets in the coming quarters,” Janus Henderson also expects.

In terms of sectors, the management company believes that recent announcements have created positive momentum in compartments such as technology, consumer, real estate, commodities, healthcare and financial services. More broadly, high-quality companies with strong fundamentals are likely to benefit the most from increased liquidity and supportive policies.

The stakes of the American presidential election

“The latest stimulus package marks a turning point for the country’s economic trajectory and stock markets. As global investors seek stability amid uncertainty, the Chinese government’s decision to shift from debt control to support for growth could be the catalyst needed to restore confidence and unlock value in Chinese markets,” concludes Victoria Mio.

In a note published this week, the UBS bank also said it was optimistic for the future on the Chinese markets, in particular because the Swiss bank is counting on additional budgetary and monetary support from the Chinese authorities.

“Overall, we are more optimistic than at the start of last week, thanks to better policy coordination and greater determination (from Chinese authorities, editor’s note) but we believe that the trajectory will depend on the relative level of budgetary support, policy execution and purchases on the capital markets”, explains the Swiss establishment.

UBS table sees a potential for a “single digit increase”, between 1% and 4%, for Chinese indices in the fourth quarter but then “high single digit”, between 5% and 9%, for 2025. A potential which will however depend on the result of the American election next month, warns the Swiss bank.

In terms of sectors, it favors Chinese players in the internet, consumption, telecoms, energy and the financial sector. Beyond China, Australian mining groups (like Rio Tinto) and big European luxury names could benefit from a recovery in the Chinese economy, she explains.