Dividends, stock buy-backs a bright spark in China market: JPMorgan fund

“We are seeing [that] a lot more companies are willing to improve shareholder returns, and [are] more committed to that,” said Lilian Leung, a portfolio manager for the firm’s China Income Fund in Hong Kong. “This is going to be a structural change going forward, and [will be] sustainable.”

To support their valuations and fend off pessimism from the broader market, the country’s biggest firms are stepping up dividends and buy-backs. Members of the CSI 300 Index generated an average dividend yield of 2.94 per cent this year, the highest on record, according to Bloomberg data.

Meanwhile, their peers listed in Hong Kong have spent a record US$14 billion on repurchasing their own shares, with market heavyweights such as Li Ning, Meituan and Wuxi Biologics unveiling buy-back programmes worth a combined US$2.8 billion this month.

“From the absolute level or valuation perspective, the market has potentially reached the bottom,” Leung said. “When we see some tailwind from an economic recovery, [such corporate actions] will add support to ratings.”

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The US$305 million China Income Fund co-managed by Leung has suffered a 7.6 per cent loss so far this year, after declining 16.3 per cent in 2022 and 1.6 per cent in 2021. It has, however, outperformed peers, which have recorded an average loss of 17 per cent this year, according to Bloomberg data.

The fund has allocated around 60 per cent of its assets to equities and the rest to fixed income. Tencent Holdings, China Construction Bank and Ping An Insurance, among its top stock holdings last quarter, have slumped by 5 to 36 per cent this year.

As US interest rates peak, China will have more room for policy easing next year, which will provide the markets with more support, Leung said. With a 5 per cent expected yield plus earnings growth, her fund’s total returns will be skewed towards high single digits or lower double digits next year, she added.

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Leung said her most overweight sector is utilities, which tend to have a steady and predictable stream of income regardless of the macroeconomic cycle. Industrial companies and technology hardware makers are also among her top picks as global demand remains solid, she said.

The fund reduced its exposure to consumer staples in the third quarter, as deflationary pressures made it more difficult for these companies to improve and generate top-line growth.

Consumer confidence remains subdued amid weak income growth expectations and the ongoing property downturn, and local government debt will continue to weigh on China’s economic outlook. That means Chinese stocks are likely to stay rangebound with volatility persisting at least through the first half of 2024, Leung said.

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“Some investors may not have full confidence in a strong economic rebound,” she said. “But these shareholder-friendly corporate actions offer some upside potential on the equity side, with downside protected by fixed-income exposure.”