China — better fortunes to come?

Year of the Rabbit: luckier for investors?

Allianz Global Investors (19 Jan 2023)

“With equity valuations looking reasonable, and corporate earnings potentially set to rebound, progress is being made on two issues that weighed on market sentiment over the past year — the government’s zero-Covid policy and difficulties in the property market.”

“Investors can also explore the long-term investment case for China around technology innovation and climate progress amid its drive for self-sufficiency.”

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Why China could offer a rare source of growth in 2023

Abrdn (20 Jan 2023)

“Ultimately, we would highlight four key reasons for investors to consider an allocation to Chinese equities now — not least because the market has been so depressed until the past few months that any pick-up in sentiment will likely help it spring back like a rubber band.

1. China is on the opposite side of the economic cycle to many developed markets, with benign inflation enabling Chinese policymakers to retain an accommodative monetary and fiscal stance…
2. Valuations are appealing. China’s A-share market is trading at around a 35% discount to its 15-year average on a price-book basis…
3. Chinese equities enjoy low correlation with global equities. … An allocation to Chinese stocks could offer diversification benefits at a time when advanced economies are locked in a policy-tightening cycle.
4. The Chinese government is committed to fostering a culture of innovation to drive economic growth. … Already it has a large global market share in the manufacturing and production of solar, battery and wind power.”

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Rediscover China’s equity opportunities as borders reopen

JPMorgan Asset Management (February 2023)

“As China’s economy reopens, undemanding valuations and a growth-friendly policy path could present equity opportunities.”

“Active management is crucial when seeking out long-term, secular growth opportunities in China’s markets. We believe technology, consumer and renewables are key themes as China lives with Covid-19.”

“Currently, valuations of China equities look relatively undemanding, as illustrated in the chart below. This, coupled with the shift to a growth-friendly policy stance and subsequent economic recovery, may have meaningful implications to the outlook of China’s equity markets.”

Valuations look undemanding and China’s economic reopening could present a fresh catalyst for recovery

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What will the Year of the Rabbit bring for investors in China?

Schroders (20 Jan 2023)

"Despite the recent rebound, we continue to see solid valuation support for equities in China and Hong Kong."

"We are optimistic that the slow normalisation of outbound tourism should help to constrain the deterioration of the balance of payments and stabilise the Chinese renminbi. (The balance of payments is the difference in total value between payments into and out of a country over a period). This currency stability, along with muted inflationary pressures and a modest pace of economic recovery, should bode well for Chinese government bonds because monetary policy can stay accommodative."

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What could China’s reopening mean for markets?

Neuberger Berman (12 Jan 2023)

“Sectors benefiting from this recovery could include transportation (e.g. airlines), retail (e.g. restaurants), outbound tourism (e.g. Macau gaming and Hong Kong retailers), consumer discretionary (e.g. apparels), and healthcare (e.g. medical services). Meanwhile, fiscal and monetary policies should remain largely growth supportive, especially in the absence of any meaningful inflationary pressures.”

“In fixed income, we are especially enthusiastic about the prospects of convertible and property sector bonds. Convertible bonds participate in equity upside with limited downside risks. On the property front, a significant portion of China’s high-yield property bond universe is trading at distressed levels.”

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China: Why Covid reopening will boost (and constrain) growth

Abrdn (20 Jan 2023)

“The attempt to maintain a zero-Covid policy … has had a chilling effect on household consumption over the past 12 months. Pent-up demand is therefore considerable. Once unleashed it’s likely to make China the fastest-growing economy in the world by the end of this year.”

“Moreover, because China’s economy has been operating below capacity for almost two years now, there’s plenty of room for demand to expand without hitting capacity constraints (and igniting the excess inflation seen in most other countries).”

“Meanwhile, stronger Chinese financial markets will also have spillover effects on the rest of the world, partly acting against the efforts of central banks elsewhere to tighten monetary policy and fight excessive inflation.”

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China outlook: The faster the reopening, the earlier the recovery

PIMCO (8 Feb 2023)

“We are constructive on China’s recovery in 2023 because its economic cycles tend to be policy-driven … China’s economic agenda will be focused on one thing this year: growth. Key policy focus areas include expanding domestic consumption, attracting and deploying foreign capital, stabilising the property market, and revamping the tech sector.”

“We believe macroeconomic policy will likely remain supportive in the first half of the year and then begin to normalise. We expect the government will continue to relax regulations in sectors such as housing, education, tech, and gaming in order to stabilise growth.”

“The export sector, which was a key growth driver for China during the pandemic, poses a potential headwind. Exports have seen a sharp decline in some of the major developed markets, as consumer demand switches from manufactured goods to services.”

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Building a long-term resilient portfolio through Endowus

It is impossible to predict how macro events such as this would play out, or to prepare for any consequent implications on your investments. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With digital wealth platform Endowus, you can plan and manage your money — by investing in best-in-class funds and globally diversified, intelligent, low-cost funds and portfolios seamlessly.

Click here to get started with your investing journey with Endowus today.

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Read more: Endowus Satellite Portfolios: On China equities — a 2022 update

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