Is the dragon burning its wings?

As the investment community ponders a possible economic recession, China is once again showing its time ahead.

Benjamin Burgundy, fund manager, and Olivier de Berrange, director of information technology

Benjamin Burgundy, fund manager

Whether it is economic activity, regulation of technology companies, geopolitical and political fears, the real estate market … all indicators are in the red and may indicate that the Middle Kingdom is experiencing a strong economic slowdown. Can these configurations contribute to investment opportunities? In terms of stock market valuation, the famous price-to-earnings ratio indicates that Chinese stocks, including technical ones, are more attractive today. What is it really?

There are many reasons for the fall of the Chinese stock market. The first is the regulation of Chinese technology companies, which aims to limit anti-competitive practices and regulate the use of data. Another reason is the dispute between the United States and China over the audit of Chinese companies registered in the United States. Added to this is the regulation of the real estate market, which may be reminiscent of the horrors of the 2008 economic crisis in the United States, the revival of the policy of “zero Covid”, as well as the restoration of fears related to China’s geopolitical ambitions. , in particular with regard to Taiwan.

Olivier de Berrange
Olivier de Berrange, CIO

As for the market, some well-known investors are sounding the alarm and prefer to run away from this market, which they now consider risky, although endowed with strong long-term potential.

In the medium term, although China’s strict health strategy is indeed leading to a domestic economic slowdown with international repercussions, we are seeing a reduction in Covid cases, slight weakenings in some cities and a resumption of intra- and long-distance mobility. quoted. And although road, rail and sea freight remain weak, they seem to have bottomed out.

On the political side, the Politburo reaffirmed at its last meeting in late April its desire to expand its agreement on monetary and fiscal policies to combat the economic downturn. It’s usually a great catalyst for risky assets, but the market seems to be fluctuating.

One of the reasons for this fluctuation lies in the field of geopolitics, in this case – the transparency of accounting of Chinese companies listed in the United States. According to Bloomberg, discussions on this topic will progress. If this were the case, it would avoid the exclusion of these companies from the American market and, consequently, its possible negative consequences.

Another, more obscure reason is Xi Jinping’s ambitions for Taiwan, which he considers “his 23rd province” and which he has already threatened to invade. According to the Financial Times, on April 22, an emergency meeting of Chinese regulators and representatives of national banks gathered to organize the protection of Chinese assets abroad in case of invasion and US sanctions.

For the investor, risk-taking may seem appropriate in terms of China’s economic positioning, valuation, and fiscal and monetary policies. Geopolitical risk is more difficult to understand given the commercial ties between China and the rest of the world. After Putin’s invasion of Ukraine, China’s invasion of Taiwan is a hypothesis that, if implemented, will undoubtedly lead to a clear decline in Chinese assets …

The information provided is the result of an internal study conducted by the management team as part of its UCI management activities, and not a financial analysis in the sense of the situation.

This analysis is based on the best sources we have and publicly available information. They are in no way mandatory for La Financière de l’Echiquier and are not investment advice.