At Fidelity Multi Asset, we maintain a bias in equity regions to Asia, and more specifically Greater China given the larger share of energy importers, more attractive long-term themes like China consumption, and more positive signs on the virus. Overall caution on the emerging markets complex is needed though, as the institutional capacity to embark on stimulus, keep rates low, and avoid capital flight varies greatly by country.
In recent weeks, Chinese authorities have started to roll back some of the most severe measures for containing the spread of Covid-19 after the number of new cases fell. We think that it is too early to add portfolio risk aggressively while much of the rest of the world remains in lockdown, and China’s ability to bounce back may be unique given the state’s role in the economy, but there is an emerging near-term case for increasing investment in China.
Economic activity in China is edging back. Some of the leading macro data is now being supported by on-the ground stories of schools opening in some regions, people returning to restaurants and busy recruitment firms. There are also strict measures to control the risk of another wave of infections, including health tagging, multiple temperature checks in public and mandatory quarantines for domestic travel. There is still some way to go to reach normal levels of business, backwards looking data looks shockingly bad, and Covid-19 has not gone away, but markets look forward and things are moving in the right direction.
That should bode well for Chinese equities which, at the time of writing, are still down over 7% year-to-date. Valuations look attractive versus long-term averages and with reference to government bond yields which are being forced down by the PBoC’s monetary easing policy. Total social financing in China is often a good leading indicator for industrial activity and domestic equities, and it recently rose to a record high level. It could be that manufacturing and industrial companies recover quickest, which is perhaps reflected in that they drove the recent recovery in investment spending. Valuation metrics for these companies, which are typically considered value-style stocks, look interesting with the spread between the 1 year forward PE ratio for growth and value stocks currently close to its widest ever level. Overall, as China leads the world out of Covid-19 lockdown, our team’s bias to Asia supports a near- and long-term case for Chinese equities.
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