China: Rebuilding Sentiment

By Siyabulela Nomoyi – Quantitative Portfolio Manager, Satrix

On 22 July 2020, Satrix launched the Satrix China ETF tracking the MSCI China Index which captures the large and mid-cap sectors across China A shares, H shares, B shares, Red chips, P chips and foreign listings.

It has 717 constituents and covers around 85% of the Chinese equity universe. Apart from being labelled as the factory of the world, China plays a major role in South Africa from an economic point of view as well as due to its impact on the performance of our local stock market.

China’s Influence on the SA Economy

As at the end of November 2022, China is South Africa’s number one trading partner, as 10% of our exports go to China while 20% of our imports come from China. In 2009, China surpassed the US and EU in terms of our exports, with South Africa exporting $4bn while importing $35bn.

When former president Zuma visited China before we officially joined BRICS, the relationship between our two countries was dubbed as being an upgrade from a strategic partnership to a more comprehensive one.

A large interest China has in South Africa is the country’s abundance of mineral resources, for which China brings huge demand. Even after the global financial crisis in 2008, China still had massive GDP growth which was mainly pushed by its investment in infrastructure, though there were other factors as well, like low labour costs and high productivity.

Their massive investment in infrastructure required the supply of a significant quantity of commodities, and South Africa was readily available to meet this demand. South Africa’s top export to China is ore, either in the form of iron or manganese, and other metals like zinc and copper. Mineral fuels like coal and petroleum oils come next, with alloys and stainless steels also needing a mention. This means that China’s demand for these exports from South Africa plays a big impact on the pricing of our commodities. In the fourth quarter of 2022, rating giant Fitch said that they see the construction sector slowing down as China’s fixed assets were more likely to expand at a slower pace, which would mean less demand for commodity imports into the country.

Local Equities and China

The Chinese love to buy luxury goods. In fact, China is the second largest personal luxury goods market worldwide. At the beginning of 2022, China grew its expenditure on luxury goods by 31%, with a 10% share of a market that is valued at around $380bn.

A name familiar to local stock watchers is Richemont (CFR), a major luxury goods business. Another example is Britain’s Burberry. China’s approach with its zero-COVID policy dampened the big spenders’ ability to splash out more on Louis Vuitton bags and Swiss watches, so much so that sales in the sector were down 25% in the last quarter of 2022.

Stock watchers always keep an eye on sales results from Richemont, and the stock holds the biggest weight in our local market cap index; the FTSE/JSE All Share index, at 15%. The second biggest stock in the All Share index is Anglo American (AGL) at 10%, which exports basic materials like iron ore, manganese and platinum, with China as a huge client. Lastly, Naspers (NPN) at 9% is the third largest weight in the local equity market and provides investors with exposure to China’s very own Tencent, a stock largely influenced by policies around its gaming platforms and entertainment. This means that around a third of the JSE equity market’s performance is influenced by three stocks which have a significant portion of sales linked to China.

Performance

Since February 2021, Chinese equities tumbled and investors faced massive volatility and, as a result, in 2022 stocks in the country traded at their lowest levels in years. COVID-19 restrictions limited population mobility, while the housing market in the country also struggled and was seeking bailouts from the government. China’s domestic consumption accounts for 50% of its GDP, which the zero-COVID policies had dented. The property sector in China contributes 25% of the country’s GDP, so when there were uncertainties and defaults in the sector, it made sense that investors would be worried, driving the markets down even further as China’s property giant Evergrande missed debt deadlines and defaulted in payments. As a result, in 2021 the MSCI China Index was down 21.7% and in 2022 it was down 21.9% net USD.

The year 2022 could have been worse, but a big turnaround of 13.5% in the last three months of the year softened the blow.

Shanghai lockdown restrictions were lifted, and the People’s Bank of China initiated a 16-point plan for real estate stimulus, which was seen a stabiliser of the property sector as developers would have financing to complete projects while pushing sales.

Blackrock has highlighted that there are signs of deflation, with a slowing down of exports highlighting near-term hurdles beyond COVID-19. Even though Chinese equity markets fell in 2022, there were net positive flows into their funds from international investors for the year, with around $4bn net inflows. Investors looked at Chinese stocks as a source of relative value and an alternative when looking at investing outside developed countries.

China Exposure for Local Investors

The easiest way to get Chinese equity exposure for South Africans is through the locally listed Satrix China ETF, which tracks the MSCI China index, providing more direct exposure to companies like Tencent, Alibaba and China Construction Bank. The Satrix Emerging Market ETF also provides exposure to China as it is the country with the largest exposure in the fund.

If you want to move away from equities, you can also consider Chinese bond exposure. China is the 3rd largest issuer at 9% in the Satrix Global Bond ETF which tracks the Bloomberg Global Aggregate Bond index. Lastly, locally listed mining stocks that are influenced by the Chinese economy are available via the Satrix RESI ETF.

Disclosure
Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

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