Will China's stimulus save its stock market?

The performance of Chinese shares has long seemed to hinge on the actions of the powers that be. It was partly a seemingly effective lockdown that helped China's market to surge in 2020, while the regulatory crackdown that marked 2021 helped to sink valuations. More recently, other top-down issues, including a seemingly slow emergence from further lockdown measures, appears to have held the market back.

Fast forward to 2024 and the prospect of major fiscal stimulus has boosted Chinese and Asian indices, even if the huge gains made when the news was unveiled in September have retraced to an extent.

In late September, the People's Bank of China cut its benchmark interest rate while also unveiling funds to lend to listed companies, enabling them to buy back shares and hopefully boost markets.

Such announcements have had a big impact on returns so far this year. The MSCI China index had made a sterling total return in excess of 20 per cent for 2024 in the year to date at the time of writing, with the MSCI AC Asia ex Japan index up by around 15 per cent. That breaks a run of bad performance for Chinese shares and the Asian index.

Severe regulatory measures and a stagnant property sector, among other factors, have helped to scare some investors off in recent years, with arguments made that China has simply become untouchable. Stimulus could help address some of the concerns and feed through into decent returns elsewhere, but much depends on the exact details of the stimulus package.

Possible beneficiaries

There's an argument that many sectors can benefit from a boost, should it feed through. Peter Dalgliesh, chief investment officer at Parmenion, notes that selective investors do have opportunities at hand. "Consumer, financial and healthcare sectors offer value, growth and upside to depressed valuations," he notes.

"Industrials are likely to benefit from a revival of domestic economic activity but face a headwind from growing international challenges with rising tariffs from both the US and EU on Chinese exports."

Ben Kumar, head of equity strategy at 7IM, notes that many stocks both inside and outside China appeared to have gained a new lease of life in the wake of September's stimulus announcement, with investors holding high hopes for gambling stocks that could benefit from increased casino attendance in Macau; LVMH (FR:MC) and other luxury brands seeming set to benefit from a cash-rich middle class, as well as internet giant Alibaba (HK:9988). And yet continued gains depend on whether this plays out.

Kumar points to other sectors that could do well if we do see continued stimulus. These could include Chinese semiconductor companies if the US refuses to allow high-tech names to be sold to China, as well as energy stocks. "Whatever the stimulus impacts, if it genuinely boosts growth, then Chinese energy demand will increase," he notes. 

"Chinese energy companies aren’t ever going to be allowed to make huge profits, but they’re so cheap now that they don’t need to in order to re-price upwards." Outside of China, he argues that stimulus could provide a strong tailwind for global metals and mining companies.

Furthermore, the authorities still have much to do in the property sector. Dalgliesh notes that a key focus is to "stop the rot" here, adding: "Whilst Tier 1 city property transactions [volume and price] are holding up, Tier 2, 3, and 4 are suffering from excess supply not only of existing units but also pre-sold developments. By providing funding to local governments with additional quotas for local government bond issuance there is a growing probability that the property oversupply will start to reduce."

Devil in the detail

Major action could see Chinese stocks resurge over time and narrow the gap with shares in the likes of India and Japan. There is certainly still much for China to recover from, especially the economy normalising in the wake of Covid-19 and the related lockdowns. With some sectors in China not seeing the Covid support that was evident in the west, including measures such as loan forgiveness, companies could need longer until they prosper again.

Investors do also need to look closely at the form stimulus will take, and simply whether it is here to stay. Kumar has argued that markets need "a clear sign that stimulus will continue", as well as some guidance from the Chinese government on which sectors will be allowed to make profits. China was still due to unveil further details at the time of writing.

As with the regulatory action that tore through markets in 2021, investors do need to remember that Chinese authorities can be unpredictable and companies prone to disruption. But low valuations and concrete action to boost the action could well prompt the more adventurous investor to get involved.

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