China’s stock market has been in free fall for some time now. Asset allocators in the U.S. refuse to buy in on concerns of escalating geopolitical conflict. The Chinese real estate market is in terrible shape, and policy makers, faced with crisis, have yet to take an aggressive stance.
It’s almost as if China has more of a free market than the U.S.
With the Chinese stock market down approximately 3% year to date, it’s clear that investors still don’t want to position money in the country. Sure, China’s macroeconomic conditions are among the most challenging globally, but I thought that the best investors buy when there is “blood in the streets?”
Conditions clearly favor the bears in China, as it’s not just about property. Consumer spending continues to lose steam. A combination of factors including a sluggish job market and declining consumer confidence has led to tightened purse strings, which could spell trouble for future domestic growth.
Typically, during such times, one would expect the government to step in with aggressive stimulus measures. However, the Chinese government appears to be either hesitant or incapable of unleashing the level of stimulus that investors have come to anticipate in past downturns. This restraint from the government adds another layer of uncertainty for the market.
But at the same time, it makes China’s market more a reflection of the true state of the economy, and not one that is manipulated to the extent we see in the U.S.
A Hidden Opportunity to Invest in China
Foreign direct investment (FDI) into China has seen a drop of over 11% in the past year, hitting a low not seen since the depths of the financial crisis. This eclipses the downturn experienced during the Covid-19 pandemic, signaling deep concern among international investors about China’s economic prospects.
I don’t know – that sounds like an opportunity.
Reflective of this sentiment is the outflow of funds from China-focused ETFs, with a loss exceeding $1.2 billion over the past quarter. When the vessels designed to channel foreign capital into China start to leak, it’s an unmistakable sign of waning confidence. But at some point, this trend will reverse, and a significant opportunity will emerge.
History teaches us that markets are cyclical, and every crisis eventually gives way to a turning point. For China, such a turning point could present a significant investment opportunity. But it’s always a question of when. From my standpoint, I think China is unequivocally worth watching closely here. Should U.S. technology momentum fade and we see a shift away from growth to value, it could usher in a reallocation broadly from the U.S. to overseas investments. China would benefit from that against a wave of negativity.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
