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Chinese stocks jumped after China’s central bank announced a stimulus package last week. Yan Wang, Alpine Macro chief emerging markets & China strategist, joins Julie Hyman and Josh Lipton on Market Domination to discuss how investors should be thinking about this rally.
Wang says the “flurry of measures [announced] over the past couple of days” make it “ even difficult for us to keep pace with” and show the central bank is “ in a state of panic. They are clearly feeling the pressure that the economy is in a very deep, very stressed level. So they want to try to push the economy to accelerate.”
He notes that the recent stimulus announcement is an important step for China’s monetary policymakers because it signals “they no longer see massive stimulus as a taboo,” as it had been since the global financial crisis. “I think that's one of the reasons why they hesitated so much in the past couple of years, even though the economy was slowing down. So now, clearly, kind of what I call an ideological straight jacket has been taken off. So that would allow them to be more preemptive in driving the economy.”
The China stimulus causing Chinese stocks to surge leading up to this week's Golden Week holiday. It's the second largest weekly inflow ever to China equity funds. But does the rally have more room to run or is it already too late for investors? For more, we're bringing in Yen Wan. He's chief emerging markets and China strategist at Alpine Macro. And I guess we should start in with what you think of what the Chinese government has announced and whether it is going to be effective and sort of juicing the economy. There's been some debate over that. What do you think?
Sure. Um, yes, I think, um, if I were to summarize what has happened, I think mainly three points. Number one is they announced a kind of flurry of measures over the past couple of days. Um, you know, it's even more, it's even difficult for us to keep pace with. Um, so clearly that shows they are in a state of panic. Uh, they are, you know, clearly feeling the pressure that the economy is in a very deep, um, very stressed level. So they want to try to push the economy accelerate. Number two is clearly, to me, I think the most important takeaway is, um, they no longer see massive stimulus as a as a taboo, right? So you know, if we think about it in the past, basically since the global financial crisis, um, they were saying that they will never repeat the massive stimulus programs that they did during the global financial crisis. So that's, I think that's one of the reasons why they hesitated so much in the past couple of years even though the economy was slowing down. So now, clearly that that's kind of what I call ideological straight jacket has been, has been taken off. So that would allow them to be more preemptive in driving the economy. And I think that the last point would be now clearly the they made the policy statement and then the market has responded, then it's just for as an investor, we need to begin to monitor whether these kind of policy measures will have some kind of positive impact on the economy. And that's something that, you know, for as a as a strategist, I think we need to realize that, you know, whatever they announce is one thing, but also whether the economy is able to respond is quite another. So I believe the reflation trade has further to go, especially if they think, um, they they no longer believes in, um, you know, they they don't want to massively stimulate the economy. That means if the economy does not improve, they will have, uh, more measures to come.
And you know, some strategists on Yahoo Finance were saying they really can't call right now whether what's been announced, what's to come is going to, you know, meaningfully impact the economy, the markets. But you heard them make an evaluation call. Their point was regardless, these these names have just been so beat up that they're now attractively valued. They've priced in a lot of bad news. Um, do you agree with that?
Oh, absolutely. I think, I think if you look at really globally speaking, the main asset classes, uh, we have two extreme valuation outliers. One is China, the other one is the US, right? So but if you look at DM excluding the US and EM excluding China, these two asset classes actually, their their valuation, like, for example, these two markets, they are trading at around 15 times forward earnings. China now is trading at around 10 times forward earnings. US is trading at 22 times forward earnings. So I think from that point of view, clearly there has been a massive amount of bad news priced in in the in the China stock market. I think back then people were, you know, basically were pricing for a constant, um, uh, growth deterioration policy, meaning China, Beijing will never do anything to support the economy. So I think of that expectation now has been priced out. But I don't really see the rerating is over because the valuation gap is still so huge. So if, let's say, if China is not able to achieve the valuation exceptionalism that US stocks have, if China barely catches up to EM average level or to DM average level, then we have another 50%, uh, increase from here.
And when you're looking at China, do you, if you think there's more upside there, do you just buy the whole market or are there areas that are going to be more and less attractive?
Yeah, so I think at this moment, the benchmark, I think it's probably the best bet is just to buy the benchmarks, buy the domestic benchmark and also buy the MSCI EM China benchmark, uh, because, um, so my view is, you know, the rising tide will lift all boats. Uh, right? So the market across the board, the market stock prices are very, very cheap. Um, but if I have to bet, if, you know, I have to pick some sectors, uh, I would say to buy the laggers, you know, the sectors that have been really beaten down in the past couple of years. Uh, for example, consumer discretionaries, the tech sector, um, even the property developers, uh, they are trading at such depressed levels. I think, um, they may benefit the most from this reflationary process. But other than that, I think, you know, just buy the benchmark. I think it's, you know, it's, um, it's probably, it's it's easier and safer bet.
Yen, thank you so much for joining the show today. Appreciate your time.
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“They made the policy statement, and the market has responded,” Wang says, explaining, “We need to begin to monitor whether these kinds of policy measures will have some kind of positive impact on the economy. That's something that, as a strategist, I think we need to realize that whatever they announce is one thing, but also whether the economy is able to respond is quite another.”
Wang says for investors looking to benefit "the best bet is just to buy the benchmarks. Buy the domestic benchmark (000300.SS, 930748.SS) and also buy the MSCI (MME=F)... because the rising tide will lift all boats.” He adds, "if I have to pick some sectors, I would say to buy the laggards, the sectors that have been really beaten down in the past couple of years. For example, consumer discretionaries, tech sector, even the property developers. They are trading at such depressed levels, I think they may benefit the most from this revolutionary process.”
For more expert insight and the latest market action, click here to watch this full episode of Market Domination.
This post was written by Naomi Buchanan.