The year 2023 was a rough one for Chinese stocks.

The CSI 300 Index, a benchmark for Shanghai- and Shenzhen-listed stocks, was down by over 11 per cent in 2023. That puts it squarely in the ranks of the worst global benchmark indexes, especially considering that equity benchmarks in other major Asian economies have experienced gains of 8 per cent to 10 per cent.

All this – alongside the Chinese renminbi’s slide to a 16-year low – is enough to make one a tad pessimistic. But hope might be on the horizon, thanks to several factors.

Light at the end of the tunnel?

China may well benefit from the latest movements in the United States. In mid-January, the US 10-year Treasury note yield retreated to around 4 per cent, after hitting 5 per cent in October 2023, the first time it did so since 2007.

There are also indications that the US economy is cooling – a number of regional Federal Reserve bank surveys indicate that US employers expect to hire less in 2024. With markets pricing in an interest rate cut by March, the US dollar index fell by 0.11 per cent in early January. A weaker US dollar will lead to a strengthening of Asian currencies and could stimulate capital inflows to Asia as a whole, including China.

You may argue that China has been mired in a bear market that began in January 2022. But bear markets historically last an average of 289 days – or close to 10 months. This means China could be nearing the end of this bearish season, even as China and Hong Kong stock market valuations of price-to-earnings ratios and price-to-book ratios are hitting multiple-year lows.

Moreover, in a bid to boost the country’s flagging stock market, the Chinese government has introduced a series of measures.

For instance, the country’s sovereign wealth fund has been buying exchange-traded funds (ETFs) since October 2023. Central Huijin Investment – a unit of China’s sovereign wealth fund – bought an undisclosed amount of ETFs and has vowed to continue increasing its holdings. This led to the Shanghai Shenzhen CSI 300 Index and the Hang Seng Index experiencing gains of 7 per cent and 5 per cent, respectively.

Then in November 2023, Beijing drafted a list of 50 real estate firms that are eligible for a range of financing. There was an almost immediate boost with China developer stocks gaining as much as 7.6 per cent in early trading. This trend continued in December – the Hang Seng Properties Index gained 4.66 per cent between Dec 1 and Dec 15.

What to look out for in the new season

While it remains to be seen whether these gains can be sustained in the long term, the Chinese government’s direct intervention in the market may serve as encouragement for investors. There are several sectors that stand to benefit, starting with commodities.

Commodities tend to grow alongside positive economic activities, and with the China Caixin Manufacturing Purchasing Managers’ Index (PMI) reaching 52.9 points in December 2023 – the highest reading since July – it hints at growing consumer optimism. Coupled with the 1 trillion yuan (S$188 billion) sovereign debt plan by the Chinese government to spur economic activity, commodities have the potential to benefit from the path of economic recovery.

Although the technology sector had a rocky start in 2023, the MSCI China Information Technology Index ended the year with a 0.47 per cent gain. In comparison with their US counterparts, China tech shares are trading at lower values because the bad news around Chinese stocks has been priced in. However, they are still generating profits, which could prompt investors to reconsider their avoidance of Chinese stocks.

Another sector that emerged from 2023 relatively unscathed is telecommunications. The CSI 300 Telecom Index had a steady growth of 3.79 per cent and the country’s top telecoms companies – China Telecom, China Mobile and China Unicom – had a year-on-year revenue growth of 20.1 per cent in 2023. These statistics are not surprising, considering the consistent profitability of Chinese telecoms giants over the years and their healthy debt-to-equity ratio of less than 50 per cent.

China versus Singapore stocks

It is here that a Singapore investor might ask: With a possible recovery of Chinese stocks, is this a good time to put hard-earned funds into the China market? Is there a way to balance the two?

If you are a long-term valuation investor who looks beyond short-term market fluctuations, the Chinese market is worth some attention. According to the Bloomberg Economics forecast, China is projected to have the world’s largest gross domestic product in the mid-2040s. Singapore investors seeking exposure to China and to diversify their portfolio can achieve this through Singapore-listed ETFs that follow indexes like the CSI 300, Hang Seng Index and FTSE China A50 Index.

But if you are an investor who prefers a predictable investible condition, then China stocks might not be for you at the moment. For one thing, Sino-US diplomatic and trade tensions continue to persist without any clear resolution in sight. This has resulted in Chinese and Hong Kong stocks experiencing volatility.

Singapore’s stock market has sometimes been labelled as unexciting, with its “boring” stocks and “lacklustre” price movements, but it does provide stability in the midst of global uncertainties. Comprising largely of banks, telcos, industrials and real estate investment trusts (Reits), the Straits Times Index has a record of offering consistent dividends and stable earnings. In 2023, the STI offered a dividend yield of over 4 per cent.

After the US Federal Reserve’s shift to a more dovish stance during its December meeting, there is growing anticipation of an interest rate cut in 2024, which could potentially benefit S-Reits. Early indicators of this positive trend are already emerging, as evidenced by the iEdge S-Reit index’s impressive 9 per cent gain in December. This marked the index’s strongest monthly performance since September 2010.

Given China’s substantial global influence, there is potential in this market. Whether to dodge or dive into investing in China stocks at this juncture, that will depend on one’s investment risk appetite. China has weathered its fair share of challenges, with 2023 proving to be particularly harsh. Despite this, I remain cautiously optimistic about China’s prospects and will watch to see what the new year yields.

• The writer is a trading strategist at OCBC.