00:00We're still talking about outperformance here, right?
00:02They're really outperforming their global peers this year as the market sheds its uninvestable tag.
00:08You see from this chart, basically, we have overcome or at least surpassed some of the
00:14performance that we've seen when it comes to the all-country index, when it comes to the U.S.,
00:19even when it comes to Japan.
00:21We've narrowed the gaps when it comes to outperformance in Korea and Taiwan, for example, as well.
00:25But certainly, a lot of questions of whether that uninvestable tag is forever gone, right?
00:29Let's bring in our team to talk about this as well.
00:32Our Bloomberg's Asia FX and rates reporter, Tian Chen.
00:34Also with us is Winnie Wu, head of APAC Equity Strategy and co-head of China Equity Research
00:39of B of A Global Research.
00:41Tian, I'll start with you.
00:42So, you know, can we say that this uninvestable tag in China is gone for good?
00:47Well, that's a good question.
00:49I think right now, at least for a short amount of time, people don't think China is uninvestable
00:54anymore.
00:55But actually, to be honest, when I'm in my conversations with my contacts, I think
00:59there's a pretty subtle shift in the sentiment.
01:02So before, like two months ago, three months ago, in the summer, people were super optimistic
01:06about China because they were so under-positioned in China and the valuation was so low.
01:12But after a few months, right now they've entered the point that the positioning is kind of balanced
01:17for global investors, kind of neutral, still a little bit under-balanced.
01:21But they are, it's much better compared with a few months ago.
01:25And right now, the economy is not very good.
01:28So we're not seeing a lot of data supporting the rally to go on.
01:31So there's a disconnect between the economy and the market.
01:34And more and more people are noticing the disconnection.
01:37And they're saying that for the rally to sustain into next year, they really need to see the
01:44economy to really recover, to see better activity data, to see better earnings.
01:49So for stocks, it's really dependent on the economy.
01:52But for other parts of the market, like for the yuan, it's a PBOC story.
01:55Whether PBOC wants the yuan, you just mentioned that it's entered a new, strong kind of point
02:00this year, but it's all about whether the PBOC will want to keep the yuan rallying, because
02:07on the good side, it's going to help, you know, maybe consumption and internationalization
02:11of the currency.
02:12But still, China's economy is very dependent on exports.
02:15So the PBOC has to be really cautious.
02:17Yeah, Winnie, you've talked about stocks for China this year being the great turnaround.
02:21Yeah.
02:21What surprised you the most of this year?
02:24I think on the surprise side, apparently the technology breakthrough is a big surprise, right?
02:30Nobody was expecting the narrative today, which is, well, China might be even better positioned
02:36than U.S. in certain aspects of AI, consider, you know, the electricity supply, consider the
02:42cost of all the talent and hardware that's totally unimaginable before deep seek, right?
02:49I think the second surprise was how China evolved and rise out of the trade war, right?
02:57You know, a year ago, when we look at Trump winning the election, potential escalation of
03:03trade tension, everyone perceived China to be the biggest loser and worry about China being
03:08potentially cut off from the global trade system, financial system, which might make
03:13China stocks and investable.
03:15But, you know, after this year, China actually proved its leverage and China proved that it's
03:20very well prepared.
03:21So I think that fear of China being cut off is also largely declined.
03:26So I would say those one, the long-term innovation capability is for the upside, right?
03:32If China has a growth future, whether China can continue to deliver, whether it's 3%, 4%,
03:385% GDP growth, I think now investors have much more confidence that a continued productivity
03:44gain will be driving China's long-term growth on the upside.
03:47And in terms of the geopolitical side, it's protecting the downside, right?
03:52That there's much less fear of China being cut off from the world.
03:57We're still looking for positive surprises for next year, given that, you know, as Tian mentioned,
04:01the market is getting a little bit more concerned about the macro side of things.
04:06What could be that positive surprise?
04:07Yeah.
04:08Currently, I think investors' confidence on those two items I mentioned are already very high.
04:14investors' confidence on policymakers and liquidity supporting the stock market is also relatively
04:22high.
04:23So it's kind of hard to see much more positive surprise on this front.
04:28But I would say fundamental side, market actually doesn't have very high expectation in terms
04:33of the turnaround in job market, in income expectations, in consumption.
04:38So fundamentally, the biggest positive surprise I'm hoping for is that technology breakthrough
04:46can lead to new user scenario and high-paying jobs, right?
04:51Because even now, everyone says AI is displacing, replacing jobs.
04:56But, you know, mobile internet was able to create a lot of jobs.
05:00And those were high-paying jobs for young people.
05:02So I think for the consumption to fundamentally turn around, for the property market to fundamentally
05:08stabilize, we probably need a better job and income outlook for the younger generation.
05:14Otherwise, pure monetary easing can do very little.
05:18I mean, look at Japan for the past 30 years, right?
05:21So I think, you know, technology breakthrough leading to high-paying jobs.
05:25That would be a real positive surprise.
05:27Other than that, if we can see more decisive, more forceful policy in terms of addressing
05:34the overcapacity issue, really take out the excess supply and capacity, that's probably
05:40going to be a policy measure that market will welcome.
05:45Yeah.
05:45Tan, there is that whole issue, you know, not issue, but something that has been surprised
05:50was that the people that have been participating in this equity market, and maybe this could contribute
05:54to the household wealth sort of story.
05:56Do they expect, the other people that you talked to, that this rebound in Chinese markets
06:00can actually feed into the economy in some way?
06:02I actually completely agree with what Winnie said.
06:05I think the problem right now is not lose liquidity, but it's lack of demand.
06:09So the not very good news, based on what my conversation with contacts is, that they don't expect a wealth
06:15effect to be that significant.
06:17Because a lot of investors, their money is still, a lot of households, their money is still
06:22locked in the property market, which is in a downturn.
06:25Very little of the money is in the stock market.
06:28So even though the stock market is doing well, their extra money they're earning from the
06:32stock market may be enough for an extra nice meal, but it's not going to be for extra huge
06:37spending.
06:38So that's the problem.
06:40But at the end of the day, a better market is going to be not bad for the economy.
06:44It's going to be positive in the sense that it's going to lead to better sentiment in the
06:48market.
06:48And more and more companies will seek IPOs.
06:52We did see Hong Kong's IPO market being the best, among the best in the world this year.
06:58And if overseas investors are buying a lot of China's offshore dollar and euro bonds, that's
07:05going to be supportive for the financing costs for Chinese companies selling debt overseas.
07:10So this is more on the investment side that's going to support and on the sentiment side
07:15that's going to support the economy rather than the wealth effect.
07:18Yeah.
07:19If you tell us a bit more about what could drive it.
07:22I mean, it seems like valuation story is kind of this year.
07:26What about earnings?
07:27Is that going to be the key driver of what is going to come next year?
07:30We certainly hope so, because valuation wise, not only China, China is at like 78 percentile
07:36of the past 20 years of that valuation range, which is already on the higher side.
07:41For Asia Pacific, it's even higher.
07:43Actually, for most other markets like Japan, Taiwan, India, it's 80 to 90 percentile, right?
07:49So valuation is getting a bit stretched, not only for China, but even more so for other
07:55Asian market, especially Northeast Asian market.
07:57What we are really hoping to see is earnings turnaround.
08:02But on that, to your early question about the wealth effect, right?
08:05I think, you know, Chinese household, the asset allocation to stock market is much lower
08:11than in the U.S.
08:12But even in the U.S., where, you know, stock market equities account for much bigger asset
08:18allocation, we are seeing the K-shaped consumption, right?
08:22So for China, even we hoping on the wealth effect from equity market, what we might see is
08:27K-shaped, that it will benefit a small group of wealthier, better off household that participate
08:34actively in the stock market, whereas the mass market consumption remain depressed because
08:38of the, you know, even U.S. not have the youth and employment issue, right?
08:42You know, there are similar challenges in today's AI age for both U.S. and China.
08:47So I think fundamentally, you know, betting on pure stock market recovery to driving broad
08:54consumption is a long shot.
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