Chinese equities are unlikely to see the same kind of sell-off as last year despite a renewed trade dispute with the US, according to Matthews Asia’s Andrew Mattock, who points out the economic picture in the country is looking far more robust.
The deterioration of relations between the US and China was one of the key issues affecting markets last year, as president Donald Trump took a harder line over trade. The MSCI China index falling by 18.88 per cent, in US dollar terms, compared with a fall of 4.94 per cent for the blue-chip S&P 500 index.
Performance of indices in 2018
Source: FE Analytics
After a challenging 2018, markets settled down in the earlier part of this year, with a resolution seemingly on the horizon. However, the trade issue resurfaced this month.
Concerns of renewed escalation were raised as Trump announced that a 10 per cent tariff on $200bn worth of Chinese goods would be increased to 25 per cent on 6 May, prompting plans by Chinese authorities to retaliate with tariffs on $60bn worth of US goods.
This has led to some short-term pain for Chinese stocks, with the MSCI China index down by 11.67 per cent over the past month in US dollar terms, while the S&P 500 has dropped by just 1.27 per cent.
However, Mattock – who manages the Matthews China fund – said that the latest escalation in the trade dispute should not be compared with last year when China was also struggling with its own financial problems.
“For China, the whole situation was a little bit more difficult because they were trying to deal with domestic issues as well as Donald Trump and his trade wars,” said the Matthews China fund manager.
“I think this year – from a policy point of view – a lot of the issues have been dealt with.”
Mattock said Chinese authorities had made efforts to address issues surrounding shadow finance channels and wealth management products in particular, which had seen very rapid growth, by bringing in greater regulation.
This contributed to greater domestic stress at a time when the authorities were finding themselves in greater conflict with the US president.
Despite the renewed trade dispute, Mattock said that Chinese companies are on a much firmer footing today than one year ago, with the potential for positive underlying earnings growth.
“We’re quite optimistic that the effect of the trade war issue – apart from being in the headlines every day – will be resolved because they sort of have to be and then people will start to focus on Chinese equities [again],” said the Matthews Asia manager.
“The market was up 20 per cent this year prior to the resumption of the trade war.”
2019 performance of index prior to 6 May 2019
Source: FE Analytics
Indeed, Mattock said that Chinese equities remain quite attractive from an earnings growth perspective.
“We believe earnings stories are generally what drive the market,” he explained. “If you look at the track record of earnings in China since the stock market became the place to be in 2004 – when companies started listing in Hong Kong and the mainland – the earnings track record has really been the driver behind stock market performance.”
However, the manager said that stock selection is crucial and that picking the wrong companies can have a significant impact on performance.
He added: “The biggest risk in China is the competitive intensity: you’ve got to get the stock right because there’s a lot of competition.
“But if you get the earnings right the performance of the stock will reflect that and we think that the earnings story in China is probably more robust now.
“Look, I’ve been doing it for 20 years and it’s more robust now because of the variety of stocks I have to choose from,” he said. “Whether it be travel, pharmaceuticals, media, internet or logistics, these are all new areas that didn’t exist five or six years ago, but have plenty of growth in front of them.”
Nevertheless, last year’s sell-off did provide an opportunity to refresh the Matthews China portfolio with the manager upgrading his holdings from a quality perspective.
“If you have a look at the portfolio today versus before the correction [a year ago], there were a lot of things we wanted to buy in the consumer space, internet space, pharma space, but they were just too expensive,” he explained.
“That correction last year allowed us to buy these companies at a good price, so when you look at the holdings today, I’m a lot more comfortable with the buy-and-hold nature of what’s in the fund.”
Yet Mattock warned that it remains too early to call how the current trade dispute will unfold in the coming months, although it will be in neither country’s interest for the situation to escalate.
“It’s pretty hard to give a definitive view on Donald Trump, obviously the negotiations are still taking place,” Mattock concluded. “We still think there’s not really the possibility of a trade war breaking out, because there is so much at stake on both sides.”
Under Mattock, who joined the fund in April 2015, Matthews China has made a total return of 49.05 per cent, outperforming its average IA China/Greater China peer, which has returned 36.24 per cent. Its MSCI China benchmark, meanwhile, has risen by 32.67 per cent.
Performance of fund vs sector & benchmark under Mattock
Source: FE Analytics
The fund, which Mattock co-manages with Winnie Chwang, has an ongoing charges figure (OCF) of 1.24 per cent.