As I write this, millions of people around the world are busy preparing for the spectacle of the Lunar New Year, where observers of the lunar calendar welcome in the first new moon of the year, as well as a new representative animal of the Chinese zodiac.
In 2024, it’s out with the rabbit and in with the dragon, which in Chinese culture is traditionally a revered symbol, representing power, strength, good luck and wisdom.
But investors in China have had a torrid time in the past lunar year. Although the country’s economy grew by 5.2 percent, policymakers are still grappling with myriad problems: deflation, debt, soaring youth unemployment and a shrinking population.
This has been somewhat reflected in Chinese publicly listed companies. Over 2023, the FTSE China A50 Index shrank 16.63 percent, driven largely by underperformance in the real estate sector. That had a knock-on effect on Asian and emerging market indices, which weigh Chinese real estate investment trusts particularly heavily.
On a wider scale, foreign direct investment into China turned negative for the first time since the late 1990s, while data from the Investment Association revealed sustained outflows from China or Greater China funds over the 12 months to November 2023.
It sets the world’s second-largest economy on a difficult path in the Year of the Dragon, but perhaps one that will mirror the symbolism of a winged beast soaring into the air. For one, valuations are perhaps underselling the potential for Chinese companies. Henry Ince, analyst at Hargreaves Lansdown, pointed out this week that Chinese shares are trading well below their 30-year average.
‘We think investors have readjusted their expectations for the country,’ he wrote in a note. ‘And low valuations are typically associated with higher future returns, although of course there are no guarantees. Our conversations with fund managers have painted a mixed picture: some remain cautious on the outlook ahead but others believe some companies offer compelling value at current market prices.’
What’s more, while China’s stringent GDP growth target of 5 percent may be out of reach, the IMF is still forecasting a 4.2 percent improvement, compared with a 1.4 percent average for the world’s advanced economies or a 2.9 percent global average.
All eyes will be on the annual Two Sessions – the name given to plenary meetings held by the National People’s Congress and the Chinese People’s Political Consultative Conference in March – for any sign of policy support, even more so after last year’s Third Plenary Session was postponed. Analysts seem to agree that a significant government stimulus will be necessary to achieve China’s ambitious targets.
What that means for listed companies is – unfortunately – uncertain. Whether the Year of the Dragon sees the markets rise to new heights or languish close to the ground is yet to be seen. At any rate, we wish all our readers a very prosperous Lunar New Year, and hope to see you soon.
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