China: a time for active management
While recent activity data from China has beaten expectations, conditions in the domestic property sector and household consumption mean there remain strong headwinds to growth this year. We are maintaining our 4.5% forecast for China’s GDP growth in 2022 – below the 5.5% official forecast – although we are aware of possible upside risk arising from more policy support.
Chinese equities have underperformed global and emerging equities over the past 12 months. Economic slowdown, the launch of “common prosperity”, property sector stress and zero-covid containment policy are reasons for the market weakness. At less than 11 times forward estimated earnings, the market valuation recently reached its lowest level since 2015.
While by now Chinese indexes have already priced in quite a lot of bad news, it is difficult to see an immediate rebound in corporate profits due to challenging base effects and tough consumption conditions ahead. The recent promise of policy support by vice premier Liu He is encouraging. Yet a more sustainable rebound in equities requires concrete policy details and actual implementation. We will especially need to see a rebound in the domestic part of the Chinese economy. Any rebound in credits to households would be a first pointer to healthier domestic spending.
For now, however, with growth headwinds across the property sector and household spending sluggish following the surge in covid infections and city lockdowns, we remain cautious on Chinese equities, preferring to stay on the side-lines.
At this juncture, active management and diversified investment solutions are to be preferred to navigate uncertain markets. Investors looking to exploit current market weakness to increase exposure to China should consider stocks or funds that offer high quality, secular growth and diversified exposure. Furthermore, to avoid de-listing risk, investors holding China ADRs or listing on US stock exchanges should consider converting their stocks into Hong Kong listings when available.