GLOBAL EQUITY OUTLOOK

Warming up to China

Feb 16, 2017 / By Kate Moore

Global investors have been wary of embracing China as rising debt, persistent capital outflows and a potential trade war with the U.S. threaten growth. Yet today there are powerful structural and cyclical forces that make China’s equities attractive, we believe. An overly cautious approach may mean missing out on fresh returns from the world’s second-largest economy.

Equity highlights

  • We expect global reflation and a domestic cyclical upswing, as reflected in the BlackRock GPS, to support Chinese equities. Progress on domestic structural reforms and undemanding valuations add to China’s attractions.
  • Making money in Chinese equities requires dropping one’s biases, paying close attention to policy priorities and using creative data sources to generate ideas. We believe big data can help supplement traditional fundamental analysis.
  • The biggest near-term risk to China’s stocks is a breakdown in trade triggered by U.S. protectionism. Yet trade is a smaller growth driver than in the past, and China is strengthening ties within Asia and making its economy more consumer-driven.

Snapshot

Chinese equity returns have trailed the nation’s spectacular growth since 2000, underperforming other emerging markets such as India. China H-shares – listed on foreign exchanges such as Hong Kong – have fared better than A-shares on onshore exchanges. See the chart below. Structural problems (resulting from the 2009 stimulus) and declining multiples have weighed on equity returns since the financial crisis. Earnings growth has been solid, but high levels of investment left less free cash flow to distribute to shareholders. We see these dynamics changing as policymakers press ahead with reforms, domestic and offshore valuations converge and China is admitted to global equity indexes.

When investors aren’t fully rewarded
Global equity performance versus real GDP growth, 2000-2016

Global equity performance versus real GDP growth, 2000-2016

Sources: BlackRock Investment Institute, MSCI, Thomson Reuters and Haver Analytics, February 2017.
Notes: Annualized, dollar-denominated equity returns are based on MSCI national indexes; annualized GDP growth percentages on countries’ national accounts.

 

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Kate Moore
Chief Equity Strategist
Kate Moore, Managing Director, is Chief Equity Strategist for BlackRock and a member of the BlackRock Investment Institute.
Portfolio Manager
BlackRock Scientific Active Equity
Portfolio Manager
BlackRock Scientific Active Equity
Head of China Equities
BlackRock Fundamental Equity