KUALA LUMPUR (June 29): Investors looking at US-China equities play should give the latter a second look, said Hong Kong-based asset management company Value Partners Group, as frothy US stocks valuation could warrant a flow into undervalued Chinese equities in the second half of 2020.

Value Partners, which manages US$11 billion worth of assets, sees value in China as it holds the contrarian view that US-China relations could improve much faster than expected post-US presidential elections this November.

“If we are right and [US-China] relations improve a lot after the US elections, there is going to be a shock for investors who avoided China,” its founding chairman and co-chief investment officer Datuk Seri Cheah Cheng Hye said at a webinar on "Value Partners 2H 2020 Market Outlook" today.

“I think Chinese stocks, being under-owned, will benefit and enjoy a huge re-rating. We are very optimistic about the potential,” he added.

Investors have shied away from Chinese equities in favour of markets like the US due to uncertainty from trade tensions — even when fundamentals showed improvement in the Chinese economy post-Covid-19 pandemic. According to Cheah, foreign holdings in Chinese stocks currently stand at 3.5%.

At the time of writing, the China A-shares CSI 300 index is currently trading at a price-earnings (PE) multiple of 15.7 times on the back of economic recovery, compared with the US equity indices that are trading at average PE of 21.16 times, albeit on worsening underlying economic conditions.

Fundamentals pointed to resilience in the Chinese economy, thanks to the strong domestic market. China’s May new home sales recorded a 9.3% increase year-on-year, indicating robust spending by Chinese even on big-ticket items.

This year, China, still the second largest economy, is expecting GDP to grow 2% amid the coronavirus shock, while the US, which has so far struggled to contain the pandemic, is expecting an 8% contraction.

Moving forward, regardless of how the political tension between the US and China plays out, be it worsening or reconciling, Cheah views that either cases do bode well for Chinese equities.

Given how intertwined economically the two countries are, Cheah is of the view that neither the US nor China can afford a long-term breakdown in their trade relationship and will eventually come together.

“This is especially so provided that the US-China partnership is a logical, compelling solution to economic slowdowns, as the US needs China as a supplier of goods and services, supplier of credit, huge commercial market as well as source of students, tourists and talent,” he added.

Should the tension between the world's two largest economies continue to run high and given how under-owned Chinese equities are currently, Cheah believed China equities offer strong investment opportunities in the decoupled world as investors choose to diversify their bets in the bifurcated economies.

Since investors have been piling on the US equities, and subsequently, these money will have to rotate out and go to the Chinese [market] for portfolio diversification purposes, he said.