Charles Gave, co-founder of the Gavekal group, asserts that China’s stock market currently presents the world’s most attractive investment opportunity. Gave anticipates a surge in corporate profits, particularly in sectors such as healthcare, tourism, and luxury goods. He notes that the Chinese market is undervalued compared to cash, Chinese bonds, gold, and global stock markets, describing it as being in a state of “total panic.” Gave is optimistic about China’s economic outlook, citing a stage where profit growth surpasses the cost of capital, signalling potential for increased investment and hiring. The recent positive sentiment is fuelled by a reduction in banks’ reserve requirements and news of a potential $278 billion stock rescue package from Beijing. However, some remain skeptical, emphasising the need for sustained structural improvements. Despite Gave’s past bullish recommendations on China stocks, he points to successful calls in other markets, such as Japan in 2020. Gave expresses a strong inclination to leverage up for acquiring quality Chinese equities amid the market’s significant value decline from its 2021 peak.
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By Abhishek Vishnoi
China’s battered equity market now offers the best value in the world, according to a co-founder of the Gavekal group.
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The country is set for a boom in corporate profits and investors should be piling into shares of companies in sectors like health care, tourism and luxury goods, according to Charles Gave.
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“The Chinese stock market is undervalued against cash, Chinese bonds, gold, and other world stock markets — and it is in a state of total panic,” Gave, whose group runs the Hong Kong-based asset-allocation consultancy Gavekal Research and some global funds, wrote in a note Wednesday. “It has to be the best value proposition in the world.”
He said China is at a stage where companies’ profit growth has started exceeding their cost of capital, implying earnings will boom and companies will resume investing and hiring.
The latest bout of optimism on China from Gave comes after a cut in banks’ reserve requirement ratio and news that Beijing is considering a $278 billion stock rescue package. That finally boosted the country’s stocks after a dismal start to the year as investors fretted about the economy, property sector and geopolitical concerns. The MSCI China Index has risen more than 8% over three straight sessions of gains.
Some other fund houses are also turning a bit optimistic once again. Andrew Lapping, chief investment officer at Ranmore Fund Management, said the current setup is an “exciting opportunity” for investors. Alice Shen, a portfolio manager at VanEck, said China is at an “inflection point” and can become “the opportunistic buy of the year.”
Still, skepticism about China exposure is far from over. Remi Olu-Pitan, head of multi-asset growth and income at Schroders, said in a media briefing on Wednesday that China’s recent move may provide only a “tactical lift” to the country’s assets, but more is needed for a “structural” climb.
“The incentive to reduce exposure is pretty powerful and so we think this provides a pause, but we worry any recovery will be an opportunity to derisk,” she said.
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To be sure, Gave made a similar bullish recommendation on China stocks in August — and that didn’t fare so well. The CSI 300 fell 8.7% from there into the end of the year.
Still, he has some wins to his name. He was bullish on Japan in May 2020, and since then the Topix Index has gained 71%. He said in June 2018 that world’s bear market will likely start in Europe, following which the MSCI Europe Index fell about 16% to a low in December of that year.
And now, Gave sees opportunity in a market that lost $6 trillion in value from its 2021 peak, making it the cheapest ever versus the US and regional peer India.
“I almost feel like leveraging up to buy good-quality Chinese equities,” Gave said.
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