Despite growing reluctance to invest in China in the midst of a wholesale crackdown, DBS believes that the view is unwarranted due to similar historical examples of turbulence and unchanged fundamentals.
Crackdowns across sectors coupled with hundreds of billions of dollars wiped out of Chinese markets have led to increasing doubts about the worthiness of investing in China, an issue spotlighted most notably by renowned billionaire George Soros.
«It is not uncommon to hear and to read of global investors throwing in the towel, saying: 'China is no longer an investable market’,» said DBS Bank’s chief investment officer Hou Wey Fook at a virtual media briefing yesterday. «We beg to differ. We are saying: do not write off China.»
Unchanged Fundamentals
According to Hou, Chinese equities have historically experienced 30-40 percent corrections in periods such as the U.S.-China trade war or when regulators tighten financing measures but markets very quickly return to new highs.
«After all, Chinese long-term fundamentals have not changed,» he said. «We continue to see some 6 percent annual growth going forward.»
Evergrande: Another Lehman?
Although there are growing concerns about the potential for Evergrande’s downfall to cause a domino effect in global markets, Hou believes that this will not be the case due to differences such as lower interconnectedness.
«Although being a large borrower in China, we believe the likely default event will be manageable. It is localized and it will not trigger contagion across world markets as Lehman’s collapse did,» Hou said, highlighting China’s small share of global market capitalization at 3 percent and the already defensively positioned investors.
«Unlike the Lehman crisis, I do not see the pervasiveness of highly leveraged structured products like [collateralized debt obligations]. Also, Evergrande is not a financial institution. Hence, systemic counterparty risk of the global financial system will be minimal.»
Wait-And-See For Now
In contrast to the U.S., where few players dominate future industries, Beijing is banking on the approach of reducing dependency on behemoth companies which led to a massive 40-50 percent sell-off in Chinese tech firms.
Despite moderated valuations, DBS is taking a wait-and-see approach before adding exposure to China’s tech sector.
«On the surface, it does appear very tempting to bottom fish at these bargain levels,» Hou said. «Our view is that we have to see more clarity in respect to the government’s regulatory roadmap and we will await any positions in Chinese internet and tech stocks, notwithstanding the attractive valuations today.»
Banks and A-Shares Preferred
In the meantime, banks and A-shares are DBS’ preferred sectors within the Chinese equity market. It favors Chinese banks due to limited or no impact from regulatory changes alongside a strong dividend yield of 5 to 6 percent at a sustainable payout ratio of 20 percent, compared to regional or global banks at over 50 percent.
And within the A-share market, DBS sees strong relative returns from traditional companies that are expected to ride on the long-term positive fundamentals of the Chinese economy, evidenced by recent outperformance compared to other indices such as the HSCEI (Hang Seng China Enterprises Index).
