Louis So, our Co-Chairman & Co-Chief Investment Officer, shares his latest insights on China’s equity market, the following 5 key factors to see an inflection point in China’s equity market:

1. Fund flow finally seems to be reversing: EPFR data showed consecutive net inflows to China after the Chinese New Year. Last week alone, a net inflow of USD 555 million (Source: EPFR, for the week of 15 Mar 2024) was recorded in the Chinese market, the largest since April 2023. Meanwhile, global funds’ positioning in China edged up to 2.4% in February 2024 (from 2.3% a month ago), still well below its peak in January 2021 (at 6.5%)(Source: UBS Research).

2. Property market transactions also showed some signs of bottoming out: the secondary market transactions in tier-1 cities — considered a leading indicator for the broader property market — have started to stabilize after a series of policy relaxations. The Beike KMI index, which tracks property agents’ expectations for future secondary market transactions, has remained in the expansionary zone since the beginning of this month.

3. The latest macro data also suggests that economic fundamentals remain solid: retail sales were up 5.5% year-over-year in the first two months of 2024, and fixed asset investment (FAI) increased by 4.2% during the same period, despite ongoing softness in property investment. Exports were a particular bright spot, rising by 7.1% during this period. Meanwhile, fiscal policy support is also increasing, such as through the upcoming large-scale equipment renewal and consumer goods trade-in program, to further support China in achieving its “around 5%” GDP growth target this year.

4. Fundamentals sustaining China’s long-term growth remain solid: Chinese households added RMB 16.7 trillion in new deposits in 2023 (totaling over RMB 135 trillion, nearly 110% of the country’s GDP). They saved 31.7% of their income in 2023, which remains well above the pre-COVID level of 29%. We believe the normalization of the household savings rate should drive firm consumption growth and support China in achieving 4-5% GDP growth over the medium term, sustainably.

5. Last but not least, valuations are still attractive: following a recent rebound, MSCI China is still trading at a forward-looking PE ratio of 9.5x, well below its 10-year average of 12x. Meanwhile, the Hang Seng Index, currently at 8.1x forward-looking PE compared to the past 10-year average of 11.2x. It is noteworthy that the Chinese market is also trading at a significant discount to the emerging markets (EM) (with a forward-looking PE of 12.5x), not to mention the US (22x) and Japan (16x).

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