Optimism surrounding China’s emergence from its stringent zero-Covid policy and lockdowns has all but fizzled out. Chinese stocks have given up a good percentage of gains from last year’s reopening rally — which peaked in January 2023 — and analysts and fund managers are souring on the market’s short- and medium-term prospects.

Notably, the Hang Seng Index and Nasdaq Golden Dragon China Index (comprising China-based stocks listed in the US) have underperformed the Shanghai Composite Index (see Chart 1).

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The Shanghai Composite has a much larger and broader composition of stocks as well as the likely steadying influence of domestic investors. The Hong Kong market, on the other hand, has a greater presence of global-Asian fund managers, many of whom we suspect have a Western bias, at least professionally if not personally. Given the growing geopolitical tensions between the US and China, and policy risks in the latter, many are shifting their focus to “friendlier” markets such as Japan, Taiwan and South Korea. The bellwether indices in the three markets are up by 16% to 21% year to date (at the point of writing).

Regardless, there is no disputing the fact that China’s economic rebound from the pandemic lockdowns has disappointed and is rapidly losing momentum, as underscored by a slew of recent data.

Consumer spending is turning out to be weaker than expected. The market quite likely overestimated the consumption surge, given that the Chinese government did not roll out the massive handouts that we saw in the US. Hence, Chinese households did not have the benefit of the big income spike and excess savings to draw upon.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/tongs-portfolio/should-malaysia-force-wages-rise-through-direct-wage-policy-intervention?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Should Malaysia force wages to rise through direct wage policy intervention?</a>

Furthermore, youth unemployment (those between the ages of 16 and 24) recently topped 20%. We do not discount the possibility that this figure could be an overestimation — for instance, a percentage may be working “off the books” in the gig economy-social media platforms — but there is clear evidence suggesting that China is not creating enough of the jobs being sought by new graduates.

Thus far, the government has shown little sign that it will implement any major stimulus, fiscal or monetary, to counter the downshift. It seems more inclined to provide just enough support to maintain its moderate economic growth target of “around 5%”. In fact, the government has made it a priority to clamp down on excessive speculation and overleveraging — for instance, in real estate — to manage the overall risks to the economy. In recent years, policies targeting social inequality, national security and unbridled growth and monopolistic behaviour in the private sector have taken priority over economics. And they have hurt business confidence.

The high level of private-sector indebtedness — for households and businesses — is also concerning, driven in part by previous excessive speculation in the property market. The housing market has been sluggish, with prices flattening in the past few years. Case in point, new home sales by area fell 11.8% on the year in April, a steeper drop than the 3.5% in March.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/tongs-portfolio/greedflation-stock-prices-and-policy-implications?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>‘Greedflation’, stock prices and the policy implications</a>

Deleveraging typically takes years to unfold and in the meantime, will act as a dampener on consumption and investments. The Chinese yuan has fallen sharply against the US dollar this year — and will likely stay weak for the foreseeable future (see accompanying charts).

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Manufacturing and exports — key growth drivers for China in the past — too are slowing, on the back of the global economic slowdown and consumers shifting their spending from goods to services. Globally, retailers are now focused on paring inventory rather than restocking. This is also evident in the order slowdown in the Malaysian manufacturing sector, which is part of the global supply chain.

The global supply chain itself is changing, as foreign companies diversify their manufacturing production out of China to other Asean countries, onshoring and nearshoring given national security and geopolitical concerns. The US tightening exports of advanced chips and equipment to China will also hurt its economy in the short and medium terms as it now has to invest heavily to boost domestic production capability. In short, we see a “transition” period of moderate growth for China in the foreseeable future.

All of the above brings us to a sobering conclusion. We were wrong in our betting big on Chinese stocks, at least for the short and medium terms. We did not have “on the ground” insights and could not accurately predict changes in the Chinese economy — until they were reflected in the published data, which by then it was too late to react.

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

We have to acknowledge that our experiment to replicate the success of the Malaysian Portfolio with the Global Portfolio has failed. As we have previous explained, we simply do not have the in-depth knowledge, resources and time required to consistently pick foreign stock winners and outperform the global benchmark index. This being the case, we have sold off all our holdings — with final total portfolio returns of 24.1% since inception in December 2017 — and will no longer maintain the Global Portfolio, though we may continue to write on select stock ideas from time to time.

That said, we still believe that diversifying into global stocks is the right move, particularly given the relatively poor performance of Bursa Malaysia and, to a lesser extent, the Singapore Exchange. And the best option for the average investor is to buy low-cost and passive exchange-traded index funds (ETFs) — unless you have strong conviction and knowledge in specific individual stocks.

Over the past 10-plus years (since end-2012), total returns (including dividends) for the S&P 500 and Nasdaq Composite stand at 266% and 389% respectively, while the MSCI World Net Returns Index is up nearly 160%. By comparison, the total return for the FBM KLCI is a mere 16.7% (the index itself is down 18%) and total return for the Straits Times Index is a comparatively low 48% (see Table).

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The Malaysian Portfolio is up 4.1% for the week ended June 7, thanks to gains from Star Media Group (+12.4%) and KUB Malaysia (+2.0%). Last week’s gains lifted total portfolio returns to 170.2% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 24.7%, by a long, long way.

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Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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