The Year of the Snake: time for renewal?

Key highlights

• China’s GDP growth improved in the fourth quarter of 2024
• Risks remain over the potential tariff regime in the US
• The Chinese stock market holds selected opportunities

For anyone who played snakes and ladders as a child, the year of the snake will be an inauspicious omen for Chinese stock markets in 2025. However, for the Chinese, the snake has a different and more encouraging symbolism, as a time for renewal and transformation. Just as the snake will periodically shed its skin, can China shake off its recent weakness and emerge renewed in the year ahead?

Encouraging signs

There are more encouraging signs for China at the start of this year. A robust fourth quarter of economic growth tipped GDP growth over 5% for the year, the target level of the Chinese government. The country’s National Bureau of Statistics (NBS) hailed the country’s recovery, with manufacturing and exports showing particular strength.

Partial credit must be given to the stimulus package announced in September. The Government lowered interest rates, injecting liquidity into the financial system, and improving access to funding to support business activities. Lower rates should also ease the problems in the property sector by reducing borrowing costs for homeowners. There were also measures to boost the stock market and to encourage companies to buy back their shares. The NBS said: “With a package of incremental [stimulus] policies . . . confidence was effectively bolstered and the economy recovered remarkably,”.

The stock market has also responded to the stimulus package. After negative returns in 2021, 2022 and 2023, the Chinese stock market finally returned to growth in 2024. The MSCI China index rose 19.7% over 2024, with the majority of the gains coming after the stimulus was announced in September.

What will this year bring?

The question over what next is more complicated. Will the year of the snake bring weakness or renewal? There are some acknowledged risks on the horizon. In particular, the new administration in the White House has China firmly in its sights and has threatened to substantially raise additional tariffs on Chinese imports.

This is undoubtedly problematic, and likely to be a source of volatility while negotiations are underway. That said, Chinese companies have been dealing with US tariffs for some time and are used to navigating them. The biggest risk could come in technology-related areas, where tariffs may curb China’s ambitions to be a high tech powerhouse.

Nevertheless, there are green shoots across China. In additional to the GDP figures in late-2024, a rally in some of the consumer stocks suggests that the stimulus may be working to support spending. Property prices have increased in some of the larger cities. It may not be as much as some had hoped, but it is an improvement. The market will be hopeful of more stimulus at the next National People’s Congress gathering in March. The government will be waiting to judge the shape of the new world under President Trump.

What does this mean for investors in the Chinese stock market? Even after its recent rally, the Chinese market looks cheap, with valuations low relative to its own history and to its peers. While there are undoubted risks, it is possible to find high quality, fast-growing companies that are trading cheaply compared to their international equivalents.

New opportunities

The recent difficulties in the Chinese market have created new opportunities. The Chinese market used to be a fallow ground for income investors, for example, but the team on the abrdn Asian Income Fund now has a wider choice of income options. Companies such as Tencent have substantially increased their dividends, while banks and insurance companies in China are also providing attractive dividend yields. The trust also holds groups such as Midea, which makes white goods. It fits with the theme of aspirational spending, a long-term growth story for China.

In abrdn Asia Focus, the team is also looking at this consumption theme. While there is still some pressure on spending because of the negative wealth effect from a weaker property market, consumers have the flexibility to spend more. They are not over-leveraged and have plenty of savings. The trust is invested in the main mass market travel platform in the country - Tongcheng-Elong. Travel has been among the first areas to recover in the wake of the pandemic. The trust also holds Proya, a local cosmetics company, which has been gaining market share against more expensive foreign brands. China is now the largest cosmetics market globally.

In the current environment, quality metrics are likely to be even more important. Companies with strong balance sheets, for example, and good cash generation, are far more likely to be able to weather the tariff storm. This continues to be a focus for abrdn trusts’ managers.

As the year of the snake begins, China’s outlook is still difficult to forecast. There are green shoots, but also risks from the new US administration. Nevertheless, the stock market still has a range of high-quality companies, showing strong growth, at compelling valuations.

Eric Chan is investment manager, abrdn Asian Income Fund Limited.
Yoojeong Oh is investment manager, abrdn Asian Income Fund Limited.
Gabriel Sacks is investment manager, abrdn Asia Focus plc.

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