Since September, lots of economic news was released and it confirms the slower economy, domestic consumption, and export all resulting from previous deleveraging policy.
In the past few months, the government has introduced active measures to combat the slower growth like reduce bank reserve four times, just cut rates and we expect another 2-3 cuts in 2019. Fiscal policies are now focusing on boosting the infrastructure that will support growth and help domestic consumption. Furthermore, the government is bringing more stimulus packages towards rural areas, to help people buy homes and autos.
75% of GDP growth comes from domestic consumption and exports marginally contribute to the GDP growth, whilst the newly introduced government initiatives should kick in during Q2-19
Domestic retail investors are bearish on the market, which is why we have a PE of 10.5 x, which is a decade low. Earnings growth is single digit for the market and most of our portfolio companies are looking at 20% earnings growth given our focus on entrepreneur companies, IT and internet focused stocks, which grows much quicker than SOEs.
China was the worst stock market performer in 2018 dragged down by the poor sentiment, a trade war with the USA resulting in poor sentiment, low valuation and kicking off fiscal stimulus.
MSCI will increase the A-share exposure in May/June as well so more inflows from foreign institutions. A team of 100 people from the USA was just in China to discuss the stalemate following President Trump and Xi’s meeting in Argentina in November. Progress made and we hope for a resolution before Chinese New Year’s on 5th February, a holiday that typically lasts for 10 days.