While investors have shied away from China given the country’s recent regulatory crackdown—and especially the troubles in its real estate sector—global asset manager T. Rowe Price says that the near-term volatility creates an “attractive” investment opportunity going into next year.
Globally, investors have been finding it much easier to invest in companies benefitting from Covid-19 disruptions rather than invest in Chinese stocks—but that could soon change as pandemic behavior continues to return to normal, said T. Rowe Price in its annual global market outlook.
American investors have largely avoided Chinese stocks in recent months as regulators are cracking down on major real estate developers like Evergrande, which has teetered on the brink of default since the summer.
Despite recent slowdowns from the real estate sector, China’s economy remains relatively strong—with 4.9% GDP growth in the third quarter, solid exports and a stable currency.
Chinese President Xi Jinping continues to consolidate power with policy reforms, but “regulation tends to come in cycles,” points out David Eiswert, portfolio manager of T. Rowe Price’s Global Focused Growth Equity Strategy fund.
“China is in a regulatory cycle where they are taking advantage of flush global liquidity to address real estate issues,” he says, adding, “in some sense, China is fixing the roof while the sun is shining.”
With the regulatory cycle likely to fade in the next two to three quarters, according to Eiswert, there is “attractive” upside ahead and near-term volatility “should be viewed as an investment opportunity, not something to avoid.”
“With the corrections China is making in its real estate market, there is actually quite a positive outlook for the second half of next year,” Eiswert says. “Investors should be looking at China as an attractive place to invest given some of the recent distortions.”
What To Watch For:
China’s regulatory crackdown is one of the top concerns for U.S. investors today behind inflation and the Covid-19 Delta variant, according to the Federal Reserve’s most recent financial stability report. Investors are especially worried about the troubles in China’s real estate sector causing a “spillover” into U.S. markets.
Chinese regulators have tried to reduce the real estate industry’s reliance on high debt levels for growth, with property giant Evergrande struggling to avoid default since this summer, causing wider damage to Chinese real estate stocks. China’s real estate industry accounts for roughly a quarter of the country’s GDP.