China is poised for economic stimulus and major structural changes that will set corporates up for strong returns, according to Andrew Swan, head of Asia (ex-Japan) equities at Man Group.
“The sentiment around the China market obviously has been pretty poor, not just recently, but for some time now. I think investors are ignoring some of these positive developments,” Swan told CNBC’s “Squawk Box Europe” on Friday.
“People seem to have a short memory. Back in August, September [of] last year, leadership in China was very clear that they now understand the challenges that the economy is facing, particularly around deflation. And I think [in] 2025, we’re going to see the rollout of those policies they mentioned to support the economy.”
Chinese policymakers have already cut interest rates to boost growth, and traders now await more detail on the nation’s promised stimulus measures, which are expected to target areas including weak consumer demand and the struggling real estate market.
The world’s second-largest economy beat forecasts with 5.4% growth in the final quarter of 2024, but significant concerns remain over deflation and the potential impact of U.S. President Donald Trump’s new 10% tariffs on Chinese imports. Beijing has already responded with targeted retaliatory duties and this week vowed to take measures to protect its interests in the face of “bullying.”
Swan told CNBC that tariffs would have less of an impact now than they would have eight years ago, and that implementation can be avoided through a deal. Economists broadly reckon that, in their existing form, the trade measures will have a relatively contained impact even on the export-reliant Chinese economy, as many businesses have already taken pre-emptive measures to shift their supply chains following the U.S.-China trade war during the first Trump presidency.
Capital Economics estimates U.S. goods demand accounts for less than 3% of China’s GDP, and that most of this trade will continue.
Turning point
Swan argued that technological developments — including the democratization and proliferation of AI, thanks to startups such as China’s DeepSeek — and economic shifts would have a bigger impact on Chinese returns.
“I think we’re going to see a different economic model emerge, not just some cyclical support for the economy, but I do believe we’re on the verge of some pretty significant structural changes in how the growth model works. And I think we potentially will look back at this time as a turning point for consumption share of GDP, as an example, perhaps led by low income groups,” he said.
“I think that’s where the big picture is here, and that’s going to maybe change perceptions.”
Swan said Chinese earnings had come under pressure for a number of years because of the macro environment, and that expectations for corporate profit growth were very low, reflecting in their valuations.
“We believe, and there’s a lot of evidence, that what really drives the equities in the region is growth rates relative to expectations, as opposed to just absolute growth rates.”
He added, “What you tend to see is when those expectations start to be bettered, or beat expectations, equity markets do very well. The Asian markets are all very fundamentally driven. They’re driven by corporate profitability. Corporate profitability is now at an historical low, and valuations are close to that level as well. So any improvement in corporate profitability can deliver very strong returns.”
Swan acknowledged that investors were concerned about factors including tariffs, tight Chinese government control, geopolitical risk and the baggage of the recent property market crash, making investment in a nearby democracy such as India appealing.
Lincoln Pan, partner and co-head of private equity at Asia-focused alternative investment firm PAG, told CNBC’s Emily Tan last month that investors should look for “quality alpha” in India and Japan over the next six to nine months due to uncertainty in China.
“I’d say it explains why the market is where it is,” Swan said of those jitters. “The real question is, what’s the outlook, and does it change from where we’ve been? If we don’t change, the market is going to continue to underperform and suffer.”
