22 January 2023 marks Chinese New Year, the Year of the Rabbit. The rabbit is a symbol of longevity, peace and prosperity. But will there be light at the end of the tunnel for investors in Chinese equities?
The Association of Investment Companies (AIC) has spoken to investment company managers who invest in China and Vietnam (where Lunar New Year is also celebrated) to seek their thoughts on the outlook for 2023.
Rebecca Jiang, Co-Manager of JPMorgan China Growth & Income, said: “We remain optimistic about the long-term prospects for the Chinese economy, which continues to be bolstered by the strong entrepreneurial ethos of China’s private businesses as well as the growing demand from the country’s burgeoning middle class. After an extended period of lockdown, we see the rolling back of China’s zero-Covid policy as a catalyst for recovery in 2023 and expect to see an acceleration in activity as pent-up demand is released.”
Sophie Earnshaw, Co-Manager of Baillie Gifford China Growth, said: “China’s reopening from Covid controls is happening faster than most would have thought. As we enter 2023, China’s macroeconomic, regulatory and pandemic policies are looking to be aligned with a pro-growth tone, for the first time in three years. Although economic data may remain volatile for the next quarter or two, China is likely to be one of the very few major economies where growth could accelerate in 2023, enjoying a reopening recovery like much of the rest of the world had in 2022. In the longer term, we continue to think the policy focus on quality of growth instead of quantity of growth will provide exciting stock-picking opportunities in areas such as green transition, hard technology, consumption upgrade and industrial automation.”
Elizabeth Kwik, Co-Manager of abrdn China, said: “This could be an excellent time to get into China as we believe the stars are aligned for a meaningful recovery in growth, driven by consumption.
“In our opinion, domestic consumers will be the key driver of China’s economic growth in 2023. They have accumulated a significant amount of excess savings. Once the reopening benefits fully materialise in the coming months, we expect to see a rundown of this excess saving. This should benefit a wide variety of sectors – from consumer to healthcare, property and finance. Given the largest theme of our portfolios is the growth of the Chinese consumer, this expected recovery in consumption bodes well for our holdings.”
Fiona Yang, Co-Manager of Invesco Asia, said: “The abandonment of China’s zero-Covid policy has not been the only reason behind market strength. Support for the property sector and the pro-growth policy shift signalled at the annual Central Economic Work Conference in December also caught the market off guard. China can expect to see a post-pandemic recovery like that seen in the rest of the world, buoyed by returning consumer confidence, with China’s household savings ratio reassuringly at 4.7% of nominal GDP, its highest level in a decade.”
Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Regulatory and policy headwinds in the China internet space over recent years have made it very difficult for tech giants to maintain market share and return to strong margins, which had been reflected in low valuations. However, with an improving earnings outlook and easing regulation, we see an increasingly attractive risk-reward pay-off among the likes of Tencent and Alibaba, which remain large positions in the portfolio. Encouragingly, both stocks have started to reverse their declining trend and have risen over the past month.
“Elsewhere, we maintain a high degree of conviction in the long-term structural growth opportunity of China’s underpenetrated insurance industry. We have been holding insurance companies like China Life, China Pacific Insurance and have bought Ping An Insurance in the fourth quarter of 2022.”
A Vietnamese perspective
Craig Martin, Chairman of Dynam Capital which manages VietNam Holding, said: “China’s zero-Covid restrictions further encouraged global manufacturers to move some operations to other countries such as Vietnam. So, whilst a reopening of Chinese factories may see some market share of exports recaptured by China, the emergence of Vietnam as a global manufacturing hub appears to be more structurally established: in part due to labour cost advantages, and in part due to the 15 trade agreements that Vietnam has in place.
“The overall impact of China reopening is likely to be positive for Southeast Asia. Tourists from China are already starting to reappear in many Southeast Asian countries, and Vietnam will also benefit from this. A bump in demand from Chinese consumers is expected as ‘revenge-spending’, a trend seen in many countries post-Covid, is amplified on a 1.2 billion scale.”
Michael Kokalari, Chief Economist of VinaCapital, which manages the VinaCapital Vietnam Opportunity Fund, said: “Two factors that will help mitigate the slowdown of Vietnam’s economy are a surge in infrastructure spending, and the continued rebound in tourist arrivals to Vietnam. In 2023, foreign tourist arrivals reached 20% of pre-Covid levels and we expect that figure to rise to 50% this year – driven by the full resumption of Chinese tourism in the second half of this year. We believe this would add about 2 percentage points to Vietnam’s 2023 GDP.”
What are the risks facing China’s economy and stock market this year?
Elizabeth Kwik, Co-Manager of abrdn China, said: “There are several potential headwinds that we think investors should be wary of, and the first is a potential effort to try and flatten the infection curve. As infection cases continue to mount, the strain on the healthcare sector is becoming more visible. While the government is working to broaden access to Covid treatment and is pushing to vaccinate more of the population, it is likely that the authorities may consider targeted restrictions in specific cities or parts of cities to rein in the infection and bring it under control. That could potentially dent near-term sentiment in the market.
“Beyond that, further escalation of US-China tensions, particularly over Taiwan, remains a lingering issue but we do not at this point expect any sudden surprises considering the tone adopted by both countries following last November’s meeting between Presidents Xi Jinping and Joe Biden.”
Fiona Yang, Co-Manager of Invesco Asia, said: “While there are reasons to believe the domestic economy can enjoy a strong recovery, this is coinciding with a slowdown in global growth as developed market demand rolls over, which will impact China’s manufacturing sector and exports. Much also depends on confidence returning to the residential property market, although this is not a bubble as some would have you believe. Our optimism is measured though, as once China’s economy reopens fully, it will likely revert to a slower growth glide path.”
Elizabeth Kwik, Co-Manager of abrdn China, said: “We believe China’s green agenda is still alive and kicking. The country already dominates global manufacturing capacity for renewable energy and storage, but decarbonising entire economies require massive investments – leaving China in line to benefit.
“We are active in engaging with companies both before and after investing in them to improve their ESG standards. Chinese corporates continue to make great strides in this regard.”
Rebecca Jiang, Co-Manager of JPMorgan China Growth & Income, said: “Our investment philosophy centres on identifying quality companies with sustainable growth potential. In our view, corporate policies which are at odds with ESG considerations (particularly governance) are not sustainable over time. We therefore believe that integrating ESG factors into the investment process is essential to our success.”
Fiona Yang, Co-Manager of Invesco Asia, said: “We take the same approach as we do in every other country we invest in. Although it’s probably fair to say that Chinese companies disclose fewer data points, they’re not particularly out of line with emerging market counterparts. In some instances, A-share Chinese companies actually disclose more information due to regulatory requirements, such as stock pledging ratios among top ten shareholders.
“In instances where levels of disclosure fall short of those we expect, we will ask relevant questions during our meetings with company management and urge them to disclose more. We have come across situations where Chinese corporates were not even aware of the ESG assessment methodology. By connecting them with our own in-house ESG team, we are able to help them improve disclosures in the future, following many large cap Chinese companies that are already disclosing more information in annual ESG/CSR reports.”