Is a China story also an earnings potential story there?
I think very much so. You know, what has happened in China is
that it's gone through a four year down cycle and earnings.
So if you look at 40 peers, famous CEO China, that peak back in July 2018, it
went sideways for a bit and then downwards for multiple years.
And then it bottomed in October of last year.
It's been picking up since then. It's not a very great or very sharp
acceleration. But what we're seeing is that investors
are starting to have to change their mindset from what was a very easy sell
on any rally market to potentially entertaining the idea that they need to
be buying on dips as earnings continue to recover.
If you think back to October last year, in November last year, the whole
narrative by China was that the reopening is never going to happen.
Then it did. Then it was OK.
International reopening is not going to happen.
Then it did. Then it was like, OK, international
reopening has happened, but consumption will never recover because, you know,
consumer sentiment is very poor and savings are depleted.
We saw very strong consumption numbers for Q1.
Now investors are just running out of reasons to kind of avoid holding Chinese
equities here. And like you said, very much so is the
earnings recovery this year that is going to drive most of the upside from
here. The domestic nature of the reopening in
China, though, seems to be disappointing.
Investors, especially who expected countries that are dependent on this
reopening or on the Chinese economy like Korea and Taiwan to actually get more
support here. So why are you seeing the earnings
potential in those two economies? One, for example, the semiconductor
pressure continues. Yeah.
So Korea and Taiwan is more of a tech story.
And like you say, the you know, the Chinese recovery in tech demand has been
slightly slower than we expected. I think it's still on track to happen.
It's just happening at a slightly slower pace.
The point being is that if you look at earnings in Korea and Taiwan, they are
right now at cyclical bottom cyclical trough levels.
So we are in this trough formation process.
It might take a little bit longer than we previously anticipated, but it's very
difficult to anticipate further downside from earnings at current levels.
And we're starting to see price of bear across various product categories.
And if that continues to happen, we would expect like a significant rebound
in earnings estimates in Korea and Taiwan.
So if you particularly look at 2024 or 23, the recovery is quite visible.
If you focus on the quarters in 2023, it can get a bit mixed.
Yes. MC So you said that investors are
running out of reasons not to invest in China is due politics and that risk a
good reason because you take a look at the reaction to even just a threat of
more curbs from the U.S. when it comes to the chip sector, right.
We had the biggest one day drop in just about six months for the CSI 300 on
Friday. We've seen the Golden Dragon NASDAQ
sorry, the NASDAQ Golden Dragon China Index wiping out his gains for the year.
So does this tell you that these, you know, domestic facing stocks are still
vulnerable to this cut of news flow? And are you better off getting them
getting that exposure to the China rebound story externally?
This is it. This is indeed what investors have been
doing, right? Like buying, buying European stocks and
luxury stocks on the back of a recovery in China, even buying materials stocks
on the back of a recovery in China. And that makes sense.
You know, if you look at the geopolitics, like you mentioned rightly,
it's been a very large driver of the multiples in Chinese equities.
And that continues to be the case. There's no taking away from that.
But my point being that, you know, given that the starting point is in terms of
geopolitical issues between us and China.
It doesn't look very likely that we will get a significant deterioration this
year. If anything, there is a renewed talk of
senior officials from the U.S. administration visiting China in the
coming months. And if those things materialize and, you
know, nothing really significant happens in terms of China, U.S.
frictions, you can see those risks being priced out on the margin.
But like I said, this is a cyclical repricing up and down.
But, you know, on the whole, Chinese multiples don't need to do a lot of hard
work because the earnings recovery is coming through.
And that is what I think is the real story in China this year.