The most recent economic data is not encouraging for foreign investors holding money in China's stock markets; rather, it serves as a reminder that the recovery they are counting on will take time to materialize.
China's second-quarter growth statistics released on Monday revealed the country's economy is expanding less than expected, the weak real estate market in the country is showing no signs of recovery, and the country's consumers are becoming more gloomy and reluctant to spend.
Given this context, investors should expect a protracted period of time before the second-largest economy in the world can experience any kind of significant recovery that drives up its stock market, which has gained slightly over 1% so far this year.
Rayliant Global Advisors' senior managing director in the U.S, Phillip Wool, stated that investing in China at the moment is "frustrating."
Although Wool compares Rayliant's purchase of some Chinese stocks to value investing, or the process of selecting inexpensive stocks with strong earnings potential, Rayliant has been selective. Wool claims that prices should eventually rise, but he is unsure of when.
For the past month, China's benchmark CSI300 Index (.CSI300), opens new tab has been bouncing between 3,400 and 3,500 after rising roughly 19% from a multi-year low in February to its highs in May.
From its eight-month high reached in May, the Shanghai Composite Index (.SSEC), opens new tab, has also declined by more than 6%.
Investor hopes that the market might be turning around were stoked by a brief rally that was sparked by a series of support measures taken by Beijing earlier this year to support its collapsing stock market, which also saw a change in leadership at the market regulator.
However, several months later, the nation's unsteady economic recuperation and persistent real estate issue still loom, compounded by geopolitical obstacles such as escalating trade disputes with the European Union and prolonged Sino-American hostilities.
The multi-year healing process in China is the issue, according to Michael Dyer, M&G Investments' investment director of multi-asset.
According to Dyer, although the authorities and central bank are making progress, they haven't taken the bold actions that the global community expects. Geopolitical uncertainty remains a significant concern, and those seeking complete certainty will not find it anytime soon.
Hunting for bargain
Indeed, a number of investors have jumped in, pointing to appealing valuations and solid fundamentals, particularly for businesses in the nation's emerging growth sectors like manufacturing and advanced technology.
Chinese stocks are inexpensive. The price-to-earnings (PE) ratio at which the S&P 500 index (.SPX) opens new trades is 23, that of the Nikkei (.N225) in Japan is 22, that of India (.BSESN) is 23, and that of the Shanghai benchmark index (.SSEC) is half that number.
In addition, Chinese stocks have a forward 12-month price-to-book value of 0.95, while the Asia-Pacific region as a whole has a value of 1.26.
Kamil Dimmich, partner and portfolio manager at North of South Capital EM fund, emphasized the need for value investors to recognize the opportunities in Chinese equities. However, he cautioned that enthusiasm should be tempered due to the macro and policy risks China is currently facing.
In general, he is slightly underweight in the Chinese market, but "much less so" than he was a few years ago at the height of high valuations.
Up to now, foreign inflows into Chinese stocks through the Northbound Connect scheme total 37.6 billion yuan ($5.18 billion). In 2023, inflows totaled 43.7 billion yuan.
The general consensus appears to be that most investors are still holding out for a more concrete recovery to materialize, even though peak pessimism regarding China has passed. And those who have already committed are having their patience tried.
Rayliant's Wool described the experience of being a contrarian investor as painful and stressful, especially when facing negative sentiment and false starts in recovery. Despite the challenges, he is accustomed to these difficulties as a long-term active investor in China.