After talks at the G20 summit in Argentina last weekend brought a temporary truce in the China/US trade wars, Charlie Awdry, China equities portfolio manager, provides an update.
A White House statement issued following the G20 summit said that President Trump had delayed any action on his threat of 25% tariffs on Chinese imports for 90 days. News of this three-month negotiation period was positive for sentiment on China, with most expecting Trump to follow through with his threat in January.
At least one stockbroker has upgraded their view of Chinese equities on the back of this pause for negotiation. With the MSCI China Index down approximately 26%1 from its January 2018 highs, we believe much of the weak investor sentiment surrounding trade wars and the potential economic impact has already been priced in.
Valuations becoming attractive
In late October we said that growth shares were back at buyable levels and together with value shares being attractive (excluding banks), this was bullish. Did investors notice that the two mega capitalisation Chinese internet stocks Tencent and Alibaba rose in November? Across the market we feel that more attractive valuations, combined with the fact that investor sentiment is broadly negative - at a time when we are also seeing more coordinated and supportive policy action - is supportive of medium-term performance.
In the growth area of the market, we highlighted Macau casino shares as an attractive area after the recent sell-off. We added a position in Sands China in late October and increased the holding last week. The chart below shows the share price of the stock at a low in late October when we initiated the holding. At that time, the stock was trading at 11x 2014/2015 levels2 on an EV (enterprise value) and EBITDA (earnings before interest, taxes, depreciation and amortisation) basis, despite good growth potential.
Sands China share price
Source: Bloomberg, in Hong Kong dollars, as at 4 December 2018.
Past performance is not a guide to future performance.
In short, we do not deny that there are medium-term macroeconomic issues to address, such as debt and the currency, but the long-term case for China remains very much intact. A selective approach to investing in the region looks even more compelling with some valuations currently at attractive levels.
1 Thompson Reuters Datastream, as at 4 December 2018
2 Janus Henderson Investors, as at 31 October 2018