Further action needed to solve China’s real estate problems – Value Partners

Kelly Chung, Chief Investment Officer for Multi Assets at Asian asset manager Value Partners, shares her latest insights on multi-assets in 2024 with a focus on China.

While money continues to flow back into Greater China stocks, although their valuations have improved, they are still below their historical average, according to Kelly Chung of Value Partners.

“The sharp rise in the Hong Kong Chinese market in May was mainly due to the re-evaluation of valuations to more normal levels after the extremely pessimistic sentiment and investor positioning prevailed, due to the government’s proactive steps in announcing supportive measures, which surprised the market,” Chung (pictured) said in a statement.

“Although foreign investors have reduced their underallocation to the Chinese market, they remain underweight because some policies, such as a timeline for implementation, are not detailed enough,” she continued. Nevertheless, Chung believes that capital flows are picking up again and investors are increasingly afraid of missing out: “Sentiment has improved to a better level.”

“Although valuations have improved, they are still below their historical average,” she said. Chung believes the second leg of the rally will depend on more concrete policy implementation, particularly in the real estate sector, and an upward revision in corporate earnings after the low point.

She is not alone in her opinion. China announced a series of initiatives to support the real estate market in May. Although the International Monetary Fund has just raised its growth forecast for China from 4.6 percent to 5 percent in 2024 after a strong first quarter, China’s real estate problems remain a drag on growth. Some analysts say the measures are not enough to achieve a sustainable recovery. You can find more comments here.

“As demand for artificial intelligence remains strong and fears of a demand peak subside, tech-heavy markets in Asia are recovering after a correction,” Chung added. “However, the performance in South Asia is mixed, with signs of a decline in earnings in Indonesia and volatility following the Indian election.”

Asian investment grade bonds
Although spreads have been very tight, Chung stressed that demand for Asian investment grade bonds for carry remains strong as their absolute yields are still relatively high. With US Treasury yields likely to fall again, she believes Asian investment grade bonds remain well supported.

Asian high yield bonds
Chung stressed that spreads have tightened significantly following the rally. “However, with Asian high yield spreads still well above those in the US, demand remains strong, especially as net issuance continues to decline,” she said.

Emerging market bonds
Spreads have tightened even further, while demand remains strong. With government bond yields likely to fall again, Chung believes emerging market bonds will continue to be well supported.

gold
Gold prices consolidated after breaking through their all-time highs, as expected. However, Chung believes gold continues to be a good geopolitical hedge in the medium to long term. “In addition to geopolitical concerns, investors are concerned about the dollar’s depreciation trend, which is likely to continue to support gold prices,” she added.

Multi-asset investments
Chung highlighted that a multi-asset strategy offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risky assets such as equities, credit and commodities has increased dramatically recently. In an uncertain, low-yield environment, Chung believes income is becoming an essential source of return for investors.