Will Slowing U.S. Growth Create Opportunity for Chinese Equities?

The soft landing that the U.S. Federal Reserve was hoping for could be falling to the wayside, opening up opportunities in Chinese equities, according to one hedge fund’s market projection.

“The rally in equities is set to grind to a halt as investors come to grips with slowing US growth, and seasonal factors are likely to compound the selling pressure, according to Vantage Point Asset Management,” Bloomberg reported, noting that stricter lending requirements and a cooling labor market could suggest that the U.S. could be headed for a hard landing, per Nicholas Ferres, chief investment officer of Vantage Point Asset Management.

Meanwhile, China still has the challenges it must address to reinvigorate its growth trajectory. The MSCI China index could be losing the gains it had earlier this year as optimism was abound heading into 2023.

ValueWalk also made light of a growing valuation gap between U.S. and Chinese equities. Currently, the gap is the widest it’s been in almost 1.5 years, which could mean that Chinese equities could be trading in an area of value that investors should consider if their notions err on the side of bullishness.

“Additionally, the valuation gap between U.S. and Chinese equities is the widest it has been since March 2022 and at one of the widest points it has been at any point over the last 20 years using estimates of future earnings,” ValueWalk mentioned, noting that not since the financial crisis 15 years ago has Chinese equities risen above the U.S.

“The only time Chinese equities became more expensive than U.S. stocks was during the Great Financial Crisis between 2007 and 2009,” ValueWalk added. “During the crisis, stocks worldwide suffered, but the U.S. market dropped less compared to its global peers due to the perceived safety of  U.S. stocks.”

Follow the Leaders

Value-oriented investors who might be sensing an opportunity can look at the top companies for exposure to Chinese equities. This is available in the KraneShares CICC China Leaders 100 Index ETF (KFYP), which tracks the CSI CICC Select 100 Index, which takes a smart beta approach to systematically invest in companies listed in mainland China.

The strategy that KFYP employs is based on China International Capital Corporation (CICC)’s latest research on China’s capital markets. This quantitative approach reflects CICC’s top-down and bottom-up research process, seeking to deliver the 100 leading companies in mainland China.

For more news, information, and strategy, visit the China Insights Channel.