Chinese cleantech charges up as market rallies

What happened

Chinese stocks saw a strong rally this week, driven by Beijing's $114bn stimulus package aimed at stabilizing the economy and boosting consumption. The CSI 300 and Hang Seng indices posted their best weekly performances since 2008. Key measures from the People's Bank of China, such as support for share buybacks and corporate liquidity, played a crucial role in lifting market sentiment.

As noted by Morgan Stanley, a substantial short squeeze in miners, luxury, and autos added to the rally's momentum. With over $15bn in short positions being unwound, this process is expected to continue, keeping upward pressure on China-exposed equities for weeks.

While the rally's sustainability hinges on continued economic recovery, we view these developments as a positive sign and expect the market's strength to unfold further in the near term​.

Impact on our Investment Case

Investing in China has been particularly challenging over the past two years, with multiple macroeconomic headwinds such as the zero-COVID policy, a slower-than-expected post-pandemic recovery, the ongoing real estate crisis, and industrial pressures, including demand slowdowns and production overcapacity.

Despite these challenges, we have consistently maintained a strong belief in China's critical role in the global energy transition. As the largest market, China accounts for roughly 50% of total global investments in clean energy and controls over 65% of global manufacturing capacity for clean technologies. This underscores its indispensable position as both a consumer and producer in the clean energy space.

Over the past year, we have deepened our understanding of the country and refined our exposure to high-quality Chinese stocks. This effort included on-site visits to key companies, close collaboration with our local partner Yinhua Fund Management, and a focused approach on selecting financially robust companies that are leaders in technology, have strong pricing power, and are minimally exposed to geopolitical risks.

China's fundamentals in clean technology remain robust, with key sectors like new energy vehicles (NEVs) and offshore wind showing strong growth. In August, NEV sales surpassed the 1 million mark for the first time, representing a 41.8% year-over-year increase. NEVs accounted for 53.1% of all new car sales in China, up from 37.3% last year, well ahead of the U.S. at around 10% and the EU-5 at 20%.

We are particularly optimistic about the offshore wind sector, driven by increasing construction activity in key regions. Companies like Orient Cables are well-positioned to benefit from rising demand for submarine cables as offshore projects in Jiangsu and Guangdong ramp up. We also see potential order intakes for Chinese players in Southeast Asia and Europe, as they compete with established European firms for submarine cable projects​.

Regarding solar, the industry is currently experiencing a supply glut, with many upstream manufacturers producing at a loss, as we have previously noted. As a result, we maintain zero exposure to companies in the upstream value chain. Our sole Chinese holding in the solar sector is Sungrow, which stands to benefit from lower module prices, as this fosters further installations. Sungrow, a leading inverter maker, is well-positioned to capitalize on this trend. Additionally, their growing energy storage systems (ESS) segment presents a key growth opportunity, driven by increasing demand from large-scale grid projects, which continues to boost performance.

Our Takeaway

As of now, our China exposure has contributed +2.2% to our Sustainable Future strategy year-to-date, out of a total +3.2% performance (excluding today's strong gains), contrasting with the widely followed iShares Global Clean Energy ETF, which is down -4.6%.

In addition to strong fundamentals, valuations remain quite attractive. Indeed, our Chinese holdings trade at a 50% P/E discount to the rest of the portfolio, despite earnings growth forecasted above 20% for 2025. 

With our current exposure to Chinese stocks at 27%, we are confident in maintaining this level, expecting continued positive contributions to our strategy's performance in the near term.