The Enemy of my Enemy

The 25th Shanghai Cooperation Organization summit in Tianjin brought together countries representing over 4 billion people and more than a quarter of global GDP. Many of these nations share one thing in common: they have been on the receiving end of U.S. trade policy. China could benefit the most as others look for alternatives. Is it time to buy the stock market?

The main index of China’s largest domestic companies, the “A50,” is up 10% this year and has recently broken out of a long downward trend that saw it fall almost 50% from its 2021 highs. Valuations remain reasonable, and major technology companies, such as Alibaba and Tencent, trade at significant discounts compared to their U.S. counterparts.

China’s economy, the world’s second largest, is projected to grow more than 5% this year. Authorities continue to deploy a range of monetary and fiscal tools to support momentum. Growth in the services sector is particularly strong, domestic consumption is rising, and nearly 90% of exports now go to non-U.S. trading partners, offering some insulation from bilateral tensions.

The problem is, investors remain wary after government crackdowns on corporate freedoms in 2021, and scepticism persists about the unusually smooth economic growth China has reported for decades. That may explain why China only makes up 3.16% in the MSCI World All Country index, but it seems highly disproportionate when compared to the 64.62% weighting for US stocks.