China stimulus likely to be ‘modest’ in no major boost for market, but earnings will surprise, Cambridge Associates says


China’s widely expected stimulus package will be “modest” and unlikely to trigger a monster stocks rally, but investors can expect an earnings upside in the second half as the economic recovery is still intact, said senior officials at Cambridge Associates, a US investment firm which has over US$548 billion in assets under management.

Beijing is likely to roll out targeted measures to put a floor under the struggling property sector, said Aaron Costello, Regional Head for Asia at Cambridge Associates. But broad stimulus such as interest rate cuts will not happen any time soon, as the massive local government debt burden and the rising US Fed interest rate trajectory leaves little room for easing, he said.

“I don’t expect the Chinese government to come out and pump in tremendous amounts of money into the real estate sector now,” Costello said in an interview with the Post. “From a big picture standpoint, it will be quite modest. ”

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China’s local government debt has doubled over the past five years to about 66 trillion yuan (US$9.3 trillion), the International Monetary Fund estimated, accounting for over half of the country’s annual economic output. Meanwhile, the highly leveraged property developers are also struggling to repay debt in a timely manner as borrowing avenues are limited and housing sales have slumped.

The Bund Bull in Shanghai, China, on Tuesday, Feb. 28, 2023. After three years of turbulence under the Covid pandemic, China’s leaders are expected to lay out economic goals to get growth back on track, restore confidence and avoid a build-up of financial risks. Photo: Bloomberg

Besides, the US Fed is likely to keep interest rates at elevated levels, which means a rate cut in China will put additional pressure on the yuan, Costello added.

Echoing Costello’s view, investment bank Daiwa Capital Markets also said the room for monetary and fiscal stimulus is limited in the second half of 2023. It is more realistic to expect some relaxations in property and internet sector regulations following extensive crackdowns, Partic Pan, Daiwa strategist wrote in a note to clients on Thursday.

China bulls say it is time to add to mainland stock bets as tensions ease

The lack of stimulus policies could be a disappointment for investors, who have fretted over sluggish market performance in recent months after the China economic reopening trade lost momentum. Wall Street heavy weights including Goldman Sachs and Morgan Stanley have pared their bullish bets on China and lowered their targets for major stocks benchmarks.

However Costello said investors could stay “modestly overweight” on China in the second half. The market looks attractive from a valuation perspective, he said as earnings growth may accelerate amid the continued economic recovery and with geopolitical headwinds showing signs of dying down.

Stocks in the MSCI China Index trade at 10.5 times their forward 12-month earnings, compared with an average of 14.1 times over the past five years. This compares with the 16.9 multiple for the MSCI World Index.

But the catalyst for a valuation upgrade will only come in July, when Chinese companies deliver solid earnings growth. “When companies start beating estimates, it can be a fundamental catalyst for a longer lasting rally,” Costello said.

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