Once a type of growth investment driven by tech giants, China is now a strong value play, according to DBS chief investment officer Hou Wey Fook.
While some banks remain cautious about investing in China, especially due to uncertainty driven by the worries of continued Covid-19 restrictions and lockdowns, DBS is positive on the world’s second-largest economy. In fact, it has held a bullish call on the market since the second quarter of this year which has resulted in robust outperformance thus far, relative to global equities.
According to DBS CIO Hou Wey Fook, this confidence is underpinned by the bank’s belief that Chinese equities – particularly the internet sector – now represent quality, especially in the world of rising interest rates.
«Only when the tide goes out will you see who's been swimming naked,» said Hou in a recent webinar attended by finews.asia, in reference to a quote by renowned investor Warren Buffet. «As a result, we see this continuation of the bifurcation between good quality and low-quality equities across world markets. So even when interest rates and bond yields peak out, I expect profitable tech companies to lead the way.»
No a Dot-Com Bubble
While some investors may be worried about the possibility of a repeat of the tech bubble more than two decades ago, Hou underlines that this time will be different.
«In this sell-down of growth stocks like technology, many have equated this to the dot-com bubble in 2000. The big difference is that back then, it was about eyeballs, the number of clicks, and not about actual revenue and earnings like today,» he explained.
During the 2000 tech bubble, earnings plunged 55 percent compared to positive earnings growth now while price-to-earnings reached 25x compared to around 20x now.
Policy-Driven Correction
Instead, the bank believes that the recent Chinese internet correction has been primarily driven by a policy shift rather than concerns about long-term profitability.
«In contrast to the US where just a few companies dominate the areas of cloud computing, e-commerce, app stores, and online advertising, China's approach is really to move away from too high a dependency on behemoth institutions,» Hou said, highlighting policy changes towards common prosperity and a greater focus on transparency.
«This shift in the policy approach is the primary reason behind the massive downward adjustment in their stock prices.»
Three Cs
As such, the bank continues to see an attractive risk-reward profile for Chinese equities and it believes that relative outperformance will persist based on its criteria of three «C’s»: cheap, clarity, and catalysts.
The bank believes that the 37 percent discount of valuations compared to global equities presents great value for investors. Signs of the tech crackdown easing have provided clarity on the potential bottoming of regulatory tightening. And on catalysts, the bank expects tailwinds in infrastructure spending, tax cuts, and the strong possibility of tariff easing by the Joe Biden administration.
«China is a strong value play,» Hou said. «Clearly to us, some of the big cap names in China have favorable risk-reward given that some of them are down 60-80 percent.»
In addition to Chinese equities, DBS is also positive on US tech stocks, Japanese equities, and investment-grade bonds. The bank also advises investors to add to exposures that benefit from inflationary pressures such as real estate or commodities like gold.
