Australian equity investors should look beyond headline concerns about China slowing, with the country’s A and H-share valuations offering attractive opportunities, says Stuart Rae, AllianceBernstein’s Pacific Basin equities chief investment officer.
Rae argues that markets have overreacted to fears about a rapid China slowdown, leaving equity valuations significantly cheaper than both their average over time and relative to other countries in Asia.
“People are a bit hesitant on timing, frankly, they see the opportunity, and it has been a bad run for the last couple of years. But it takes some courage to say I am going to stick in there and buy some of that,” he says.
Valuations by price to forward earnings of the China A-share market are close to historic lows, Rae notes.
The investment management firm also forecasts that there will be a modest pickup in China’s economic growth in the second half of the year as the government moves to support growth through fiscal and monetary policies.
“There has been a lot of focus on a small number of indicators, but when a broader range of fundamental indicators are considered, the results are consistent with a managed slowdown,” he says.
A bottom-up, value stock-picker, AllianceBernstein’s Pacific Basin equities team is prepared to take a contrarian view to many investors where it thinks there is a potential for market mispricing.
One example Rae cites is its investments in Chinese real estate-related stocks, despite concerns about the country’s property bubble.
Rae says these stocks have been strong performers and he points to underlying fundamentals in the property sector, which belie commonly held concerns about the property market.
Since May last year, the median residential property price across 70 Chinese cities has stabilised.
Rae says that there have been inflows into the $4 billion the manager invests in the Pacific Basin equities, which include Australia and Asia, excluding Japan.
These inflows have been coming from Asian investors, including from Japan, Hong Kong and Taiwan as well as Europe.
“Some people are prepared to take on that extra risk and be a bit contrarian,” he says.
Australian investors, on the other hand, have been cautious about diving into Asia.
Rae says that institutional investors have raised concern about a doubling-down, that is, duplicating exposures in their domestic equity portfolios and the potential fallout form a hard landing in China.
“People have been cautious and watching it, and I am trying to tell them that they should be more serious about it because the opportunity is moving in their favour,” he says.