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
Disclaimer
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. It is for information only, and is not a recommendation, offer or solicitation for the purchase or sale of any capital markets products or investments and does not have regard to your specific investment objectives, financial situation, tax position or needs.
You should read the prospectus and Product Highlights Sheet of the relevant fund ( “fund” includes the ETF(s) managed by Lion Global Investors Limited (“LGI”) and mentioned in this publication (“ETF(s)”)) which are available and may be obtained from LGI or any of its distributors or (in the case of the ETF(s)) the appointed Participating Dealers (“PDs”) , consider if a fund is suitable for you and seek such advice from a financial adviser if necessary, before deciding whether to invest in the fund. Applications for units in our funds (other than the ETF(s)) must be made on forms accompanying the prospectus.
Investments in our funds are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. The performance of a fund is not guaranteed and the value of units in a fund and the income accruing to the units, if any, may rise or fall. Past performance, payout yields and payments as well as any predictions, projections, or forecasts are not necessarily indicative of the future or likely performance, payout yields and payments of a fund. Any extraordinary performance may be due to exceptional circumstances which may not be sustainable. Dividend distributions, which may be either out of income and/or capital, are not guaranteed and subject to LGI’s discretion. Any such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value of a fund. Any information (which includes opinions, estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information or contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information. A fund may, where permitted by the prospectus, invest in financial derivative instruments for hedging purposes or for the purpose of efficient portfolio management. A fund’s net asset value may have higher volatility as a result of its narrower investment focus on a limited geographical market, when compared to funds investing in global or wider regional markets. LGI, its related companies, their directors and/or employees may hold units of a fund and be engaged in purchasing or selling units of a fund for themselves or their clients.
For the ETF(s), the units are listed and traded on the Singapore Exchange (“SGX”), and may be traded at prices different from its net asset value, suspended from trading, or delisted. Such listing does not guarantee a liquid market for the units. You cannot purchase or redeem units in the ETF(s) directly with the manager of the ETF(s), but you may, subject to specific conditions, do so on the SGX or through the PDs.
© Lion Global Investors® Limited (UEN/ Registration No. 198601745D). All rights reserved. LGI is a Singapore incorporated company and is not related to any corporation or trading entity that is domiciled in Europe or the United States (other than entities owned by its holding companies).
