China Equities Undervaluation But Only Tactical Opportunity in 2024
China’s equity market is clearly undervalued and could see a phase of outperformance in 2024, if the bad news gets less intense. However, China will likely step up military exercises around Taiwan in the spring/summer, which will keep global investors wary. GDP growth will also disappoint with the structural headwinds for residential property and exports and nominal GDP will be a mere 5% in 2024 and 2025. We would see any China outperformance as being a tactical rather than strategic asset allocation opportunity.
China’s equity market is clearly undervalued on a forward P/E ratio basis and against government bonds (Figure 3). A phase of outperformance is likely at some stage in 2024, if the bad news gets less bad. However, we would see this as a tactical opportunity rather than the start of a multi-year phase of China equity outperformance. Firstly, the Taiwan presidential election in January will likely see the DPP winning. This will see China increasing military exercises and posturing spring/summer 2024 and will reawaken pessimism among foreign investors. Secondly, the economic picture will remain mixed, with residential property subtracting from GDP and exports growth being hurt by the structural shift in global supply chains. Private business also do not have the optimism seen during the 1990-2019 period. We forecast growth of 4.2% in 2024 and nominal GDP at a mere 5%). Finally, China authorities future policy easing will likely remain measured rather than aggressive, as China remains concerned about overstimulating and boosting debt/GDP ratios too far. China can probably outperform the U.S. by up to 5%, but we would see this as a tactical asset allocation play.