Although one would understand a tendency for him to talk his own book, Mansfield has always struck us as being pretty objective... herewith his views on the recent slump:
"We believe the correction in Chinese equities is at odds with China’s fundamentals. China’s economy is much healthier than at the time of the 1997 Asian crisis, with huge FX reserves (34% of GDP and the largest in the world at over $3.5 trillion), a healthy current account surplus (2.8% of GDP) as well as a moderate fiscal deficit (2.3% of GDP). Furthermore, China is unusual among large economies in that the authorities still have plenty of means available to stimulate growth via both fiscal and monetary means. The current low inflation rate of 1.6% indicates that China has room to maintain easy monetary policy and the potential to add more stimulus through further cuts in interest rates and the Reserve Requirement Ratio (RRR) should it need to do so."
"Even though the People’s Bank of China (PBOC) has [just] announced a reduction in interest rates and lowered the RRR, there remains plenty of room for further cuts if necessary. China’s large FX reserves are available to help support the currency whilst the relatively low ratio of debt-to-GDP means there is room for additional fiscal stimulus to help mitigate economic weakness. However, these positive factors are not reflected in the Chinese equity market (the Hong Kong listed H share and red chip stocks) due to the factors highlighted above."
"We consider the recent sharp decline in offshore Chinese equities to be due more to a downward spiral of redemption selling in Emerging Market funds rather than based on fundamentals and the corporate outlook."
"The cumulative inflow into Chinese equities has fallen back to the early 2010 level, suggesting that Chinese equities are under-owned. Stock valuations also look attractive with the MSCI China index trading at historically low multiples of 1.2x 2015 price-to-book (P/B) and 9.5x 2015 price-to-equity (P/E); the China H share index (also known as the Hang Seng China Enterprises index) is trading at P/B and P/E multiples of around 1.0x and 7.0x respectively."
"We believe current valuations brought about by recent panic selling could represent a good investment opportunity for investors on a 12-month view."
Our view is similar, if a little more cautious in the short-term, given some recent blunders by the government - with sentiment so fragile, it seems strange for the government to opt to introduce another element of uncertainty by kicking off a devaluation of the RMB a couple of weeks ago. However, that's more an issue of timing than anything else.
We also feel, that the broader implications of China's recent actions have been overstated in terms of global markets. Back to Mansfield:
"The combination of lower commodity prices and continued easy global monetary policy will be stimulative for global consumers, something we think will eventually come to be appreciated by markets. We anticipate a shift in investor sentiment in late September/early October on the back of (i) supportive easy monetary policies and fiscal stimulus, (ii) a clearer picture of the path of US interest rates following the FOMC meeting on 17th September, (iii) ongoing implementation of corporate reform and SOE restructuring, and (iv) an improvement in earnings following cuts to interest rates and the RRR from early 2015."
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