Mark Williams and Carolyn Chan, managers of the Liontrust Asia Income Fund argue that despite recent volatility on Chinese stock markets, China is still home to some of the best investment opportunities in Asia
The quarter began unexpectedly strongly with Hong Kong-listed Chinese companies having one of the biggest rallies in the past ten years. As measured by the Hang Seng China Enterprise Index, these companies rose 16% (HK dollar terms) in the two weeks after markets opened again following the Easter holidays. One of the catalysts will have been the Chinese government’s announcement that domestic mutual funds were indeed allowed to invest in Hong Kong-listed equities via the Hong Kong Shanghai Connect. But this was only an affirmation of an already existing but unclear rule, so it cannot have been the single driver of the rally. There were also a number of statements from government outlets highlighting that Hong Kong-listed equities appeared cheap.
We have been saying exactly this for some time, but it seems that the Chinese administration has more clout in shifting sentiment. The speed of the rally was something of a surprise, driving our holdings in China to a peak aggregate valuation of 11.4x forward earnings, with 10.5% expected earnings growth to 2016 and 3.3% dividend yield. While in retrospect this would have been a good point at which to take profits, we still viewed these valuations as fair, and certainly more attractive than the regional or global alternatives. We subsequently saw a dramatic sell off in Chinese equities that accelerated through the remainder of the quarter.
This retracement affected our holdings in Hong Kong-listed Chinese companies, but it was led by a correction in the domestic Chinese exchanges in Shanghai and Shenzhen (where A-shares are traded). Prior to the sell-off, our view had been that Shanghai and Shenzhen were expensive, trading at 18x and 40x PE respectively. Having now fallen to 15x and 30x, our view remains that they are not cheap enough to attract our investment.