Why the China stock market is holding up better than the UK

Despite being the epicentre of the pandemic, the Chinese stock market has fallen very little year to date: it is down just 4.4%* compared with -12.8%* for the wider Asia ex Japan market and a shocking -31.7%* for the UK.

According to the managers of Stewart Investors Asia Pacific Leaders fund, at least part of the reason for this is China’s policy of government intervention in stock markets during times of stress – including the direct buying of equities by the ‘National Team’, a group of financial institutions earmarked by authorities to help support asset prices. The presence of this group means there is some downside protection for markets.

The team behind Matthews Pacific Tiger fund added: “Most people in China believe that their government has the political will, tools and resources to undertake the kind of large-scale stimulus that enabled China to put a floor under global growth during the Global Financial Crisis. This is another reason why China's domestic stock market has fallen far less since the start of the year than many of its overseas counterparts.”

But what has been the impact on the Chinese economy?

According to the Matthews Pacific Tiger fund team, a few days ago, China published the worst macro data since the Tang Dynasty (which ruled from 618 to 907!)

“But with most shops, factories, offices and restaurants shuttered, and the economy on lockdown, this shouldn’t be a surprise,” they said. “The ugly numbers – which were far worse than expected, is also a good sign as it means China's leaders were focused primarily on fighting the virus, rather than on short-term economics. Moreover, these ugly numbers indicate that the leadership didn't fudge the data to hide the seriousness of the situation.

“When thinking about prospects for the Chinese economy through the rest of 2020, one of the most important factors is whether coronavirus remains under control,” they continued.

“At this point, China appears to have wrestled COVID-19 into submission. Over the five-day period ending March 18, the average number of daily new cases was 21. During the five days ending February 18, the average was 2,067 new cases per day.

“China's progress in containing the virus gives hope to, and offers lessons for, the rest of the world. A study by a team of researchers from the U.K., U.S. and China found that the non-pharmaceutical interventions used in China were effective—especially early case detection by testing—and contact reduction (social distancing). Without those measures, the number of COVID-19 cases would likely have shown a 67-fold increase.

The return to normal will take time, and there will be sectoral differences. For example, it may take longer for services like restaurants and entertainment to bounce back. Not because people can't afford to eat out or go to the movies, but because it may take them a while to feel safe from the virus in crowded places. But the recovery is underway.”

Martin Lau, manager of First State Greater China Growth fund, added: “Previous crisis have opened up opportunities, especially when fear has been greatest. Tourism and retail have been hit the hardest but strong brands and franchises offer hope. You just need to be confident that the companies you hold in your portfolio can survive and grow market share.”

Mike Sell, manager of Alquity Asia, concluded: “China has come out the other side of the pandemic, but questions remain as to whether the virus will come back. If things continue on their current path, things should be ‘back to normal’ by the end of June.”

What about wider Asia?

Stewart Invests Asia Pacific Leaders fund managers believe the picture is mixed. “India’s economy was struggling pre-COVID-19,” they said, “yet India, Thailand and the Philippines all spend more than 3% of their GDP (Gross Domestic Profit) importing oil and gas. A falling oil price provides some breathing space for fiscal stimulus for these countries.

“Worth noting is the historic resilience of Taiwan, which was the only Asian economy not to contract during the Asian crisis. It still remains Asia’s most resilient economy today: as a geopolitically isolated country it has learnt the hard way the importance of planning for stormy weather.”

Mike Sell added: “Generally, North Asian economies have held up well, despite lost demand from the US and Europe. We are, however, in an earlier phase of the outbreak in South East Asia.

“We are looking for three things to stabilise stock markets. Firstly, a flattening of new cases. That has already happened in China and Korea, but we are nowhere near that in the West. Secondly, a recognition that we are at, or near, maximum lockdowns - then there will be little more in the way of bad news in terms of restrictions. I think we are about at the peak in terms of bad news flow currently. Thirdly, valuations to get to a point of extreme value.”

Martin Lau added: “In terms of valuations, it would be easy to say that, now stock markets have fallen so much, valuations are cheap. But we must remember we have had 11 years of a bull market, so valuations were very, very expensive, to start with.”

Stewart Investors Asia Pacific Leaders fund managers reassured: “COVID-19 is the latest in a long line of shocks to hit Asian markets and economies. For example, the Hong Kong stock market had serious crashes in 1983, 1989, in 1997, 2000, 2003 and 2008, when it fell by over 50%. Despite these falls, it has managed to return a respectable 11% a year since 1980 for long-term investors. Other Asian markets have seen similar, frequent collapses over time.

“These are extraordinary times, but we have been here before. Who would have thought that three million South Koreans would queue up in 1997 to hand over $2bn worth of their own gold to the Government to help pay the national debt? The history of Asian markets is full of such extraordinary times. Fortunately, the resilience of good quality Asian companies, and in particular their emphasis on net cash balance sheets, should leave them well placed to weather this storm, just as they have done many times before.”

*Source: FE Analytics, total returns in sterling, 1 January 2020 to 20 March 2020, using the FTSE All Share, MSCI China and MSCI Asia ex Japan indexes.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice.

Published on 24/03/2020