Are Chinese stocks now overvalued?

27/02/2018

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In this Q&A, Charlie Awdry, China equities portfolio manager, shares his thoughts on the sustainability of the strength of Chinese equities, rising foreign inflows into the market, as well as the market pullback experienced in early February.

Following on from strong performance last year and into early 2018, are Chinese equities currently overvalued in your view?

Glamorous growth stocks are expensive but we still see a lot of value available in specific parts of the market, most notably mainland state-owned enterprises across a number of sectors such as energy, basic materials, property, banks and telecoms. 

Has there been a surge in inflows from foreign investors following China’s continued strength? Some commentators are suggesting that the inclusion of mainland A shares in the MSCI Emerging Markets Index this year may mean they will outperform other markets over the next five years – what is your view? 

The robust performance of many highly liquid, large capitalisation stocks suggests that foreign institutional investors could be closing long-held underweight positions in Chinese equities. The MSCI inclusion should give this a further boost. We believe that foreign investors have been very slow and reluctant to embrace this rally in Chinese equities but flows normally follow performance. 

Which market indicators are you monitoring that would make you adopt a more cautious outlook? 

We are keeping an eye on the vibrancy of the Hong Kong initial public offering (IPO) market for an early warning signal that investor sentiment is becoming overly exuberant. When the number of issuers rises and the quality falls then perhaps we can draw a general conclusion that we might be getting towards the end of the bull run. The spin-off of China Literature from internet group Tencent at the end of 2017 where we saw reports of more than 600 times’ oversubscription and the almost 90% rise in the shares on the first day of trading suggests the IPO market is now open and moving from a buyers’ market to a sellers’ market. Consequently, we expect Hong Kong’s industrious investment bankers to be working long hours raising capital for their corporate clients in 2018. Right now the capital raising market is certainly warming up and pipelines are probably full but we don’t think we are nearing a market bubble.   

You have long been a firm believer in the China consumer story; which other sectors are you finding attractive?
 
We still favour those consumer companies with strong competitive barriers to entry; essentially high quality growth stocks driven by consumer demand in China. While we still like consumer-driven stocks our largest sector overweight is currently to the banking sector which is unusual for us, and is a little contrarian, but one that is currently proving profitable. 

Since the global equity sell-off in early February China stocks have recovered somewhat accompanied by some market volatility. Has this changed your outlook? 

In early February Chinese equity markets sold-off just as hard as they rallied in early January. The sell-off appeared to be a global phenomenon and fortunately China’s lunar new year holiday over the second half of February means markets will be closed and everyone can draw breath, compose themselves and regain some objectivity on the markets. Chinese equities are continuing to outperform many other global equity markets so while the pullback may well slow the pace of inflows we believe the trend of investors reducing exposure to developed markets and allocating to developing markets is one that has further to run. 

We are entering the full-year reporting season and it will be helpful to see further upward profit estimate revisions on the back of these corporate updates. Chinese monetary conditions have been tightening for a few months as President Xi Jinping looks to deleverage the economy. This is unlikely to be an orderly process; the current press headlines around the financially troubled HNA Group is a case in point. We will keep an alert eye out for unexpected second and third order impacts from this process. 

Our view remains. We feel that the current upswing in corporate profitability and cash flows together with the return of reflation will keep the Chinese economy well supported in 2018. 

 
Glossary

China A shares: stocks traded in the Shanghai and Shenzhen stock markets. 

Bull run: a financial market where the prices of securities are rising over an extended period of time.

IPO:  initial public offering; when shares in a private company are offered to the public for the first time
Highly liquid large capitalisation stocks: Larger companies as defined by market capitalisation (total market value of a company calculated by multiplying the number of shares in issue by the current price of the shares) tend to be easily bought or sold in the market (highly liquid).

Barriers to entry: factors hindering the ease of entering of an industry or business area such as high start-up costs, patents, brand loyalty etc

Growth stocks: stocks that are perceived to have strong growth potential in terms of earnings. Therefore there is an expectation that the share price will increase in value.

Tightening monetary conditions: refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.

Deleveraging: reduction of debt across many areas, usually measured as a decline of the total debt relative to the country’s gross domestic product (GDP - the value of all finished goods and services produced by a country).

Reflation: when governments aim to stimulate the economy by increasing the money supply or by reducing taxes to raise price levels back to the long-term trend.

Market bubble: when overly exuberant investors drive up stock prices to the extent their value in relation to stock valuations becomes irrational.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson China Opportunities Fund

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Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

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  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
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  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
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  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund may incur a higher level of transaction costs as a result of investing in less developed markets compared to a fund that invests in more developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.

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Janus Henderson Horizon China Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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