CHINA EQUITIES – TURNING AROUND
Bottomline – It is time to invest into China equities
- China’s Central Economic Work Conference (CEWC) last December 2021 called for “Stability”, suggesting policy easing and peak regulations to prevent further economic slowdown.
- Chinese equities markets tend to perform well with policy tailwinds.
- Impact of the Omicron virus on global and domestic economic activities remains a short term risk.
- Positive on Chinese equities market in 2022.
Figure 1: MSCI Indices Percentage Returns in USD (%)
Note: ACWI – All Country World Index, IT – Information Technology
Source: Bloomberg 3 January 2022
In our previous market commentary on China, we explained that the Chinese equities market was weighed down by uncertainties from new regulations and deleveraging in the property sector, as China undergoes economic structural reforms. We were of the view then that reforms take time and it was too early to buy into the sell-off. However, we have turned positive on China as:
- Chinese equities could rebound after strong underperformance in 2021
- Peak policy risks are behind us and we are clearly in an easing cycle
Figure 2: Keywords / Phrases used during Central Economic Work Conference
Source: Lion Global Investors December 2021
CHINA’S CENTRAL ECONOMIC WORK CONFERENCE
The Central Economic Work Conference (CEWC) is an annual meeting in China to set the national agenda for the following year. The keywords from the CEWC set the directions for policies which are translated into Key Performance Indicators for local governments. Looking at Figure 2, we observed that Chinese equities returns were bad in years when focus was on economic reforms and policy tightening like in 2021, 2018 and 2015. While Chinese equities returns were good in years when the focus was on economic growth, especially after weak equities returns in the previous years, like 2019, 2017 and 2012. The key word from the December 2021 CEWC was “Stability”, which signaled a shift from policy tightening in 2021 to a focus on supporting economic growth in 2022. The key messages (source: Macquarie Macro Strategy, December 2021) were:
- Focus on “Stability” meaning that other longer term agendas like decarbonization and deleveraging would have lower priority as compared to defending the 5% economic growth target.
- Peak regulations for certain industries like the e-commerce platform as there was less emphasis on “anti-monopoly” and “curbing the disorderly expansion of capital”, while emphasizing on the positive role of capital.
- Incremental easing for the property market with more freedom for local government to set their own property policies.
Economic stability is also particularly important in 2022 as the 20th National Party Congress would be held in November this year. Markets also tend to fare well in the lead up to such important national events.
REMAINING RISKS FROM COVID-19
The Omicron wave remains a risk given the zero-Covid-19 policy adopted by the Chinese government. Currently, the Chinese government would enforce localized lockdowns when there is an outbreak in cases and multiple localized lockdowns could lead to a slowdown in economic growth. However, the irony could be that this could lead to further policy easing which may instead have a positive impact on the Chinese stock market.
VALUATIONS ARE ATTRACTIVE
Chinese equities are attractively priced with the MSCI China Index trading at 12 times 12-month forward consensus Price to Earnings ratio on 14% consensus earnings growth. We could see a rerating from the positive sentiments from peak policy risks and policy easing adding to potential market returns. As such, we are positive on the Chinese equities market.
Asia benefits from a growing China and investors could invest in a growing China through our LionGlobal Asia Pacific Fund which aims to achieve long-term capital appreciation by investing primarily in the Asia Pacific (excluding Japan) equities market. Investors who want a more focused investment strategy may consider our LionGlobal China Growth Fund. Those who are looking for a passive strategy to participate in the longer term recovery in the Chinese market can also consider the Lion-OCBC Securities China Leaders ETF or the Lion-OCBC Securities Hang Seng TECH ETF, which are listed on the Singapore Exchange (SGX).
Photo Credit: iStock
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