Chinese companies have “strong fundamentals” and earnings growth, but the path to reopening may be “gradual and bumpy”.
With China relaxing its wide-ranging zero-Covid restrictions to mitigate further economic damage, the Association of Investment Companies (AIC) has asked investment company managers for their views on what lies ahead for the country’s economy and the stock market.
Nicholas Yeo, Co-Manager of abrdn China, said: “Looking ahead, it is still early for the Chinese economy to show strong signs of recovery. However, we remain constructive on the outlook in 2023 for two reasons. First, stimulus measures have been working their way through the system in the second half of this year. Secondly, recent direction – including steps taken to kickstart the gradual loosening of the zero-Covid policy and support for the property sector – indicate that the central government is aware of the economic headwinds China is facing and is prepared to intervene to protect growth.
“Low inflation gives China more legroom for fiscal and monetary support. Further, Chinese companies have demonstrated strong fundamentals, with earnings growth of around 20%, whilst valuations remain low due to investor sentiment. It is worth noting that the likely next Premier, Li Qiang, is also a business-friendly figure, which could create upside surprises after two years of underperformance by Chinese stocks relative to other markets. Therefore, we believe the Chinese market does not need too many catalysts to recover. The consumer sectors have faced the greatest headwinds from zero-Covid and we see significant recovery potential there.”
Sophie Earnshaw, Manager of Baillie Gifford China Growth, said: “Our investment horizon is typically five years and beyond, focusing on bottom-up stock picking. China’s recent relaxation of Covid control measures indicates a potential reopening in 2023. However, the path to reopening and economic recovery will be gradual and bumpy. The continued policy focus on quality of growth instead of quantity of growth will provide long-term opportunities in areas such as green transition, hard technology, consumption upgrade and industrial automation.”
Pruksa Iamthongthong, Co-Manager of Asia Dragon Trust, said: “We’ve gone through a pretty tough 2022. Tightening monetary policy and financial conditions, a potential global recession on the horizon, China’s faltering economy amid its zero-Covid stance, and the Ukraine war all make for a complex macro backdrop that has had an outsized impact on sentiment, global growth, as well as right down to the micro level of the consumer and companies. Looking at the year ahead, we expect conditions to remain challenging.
“In such times, our portfolio positioning has turned more defensive and we have been tightening the quality of our portfolio, given that it is even more important to protect against downside now. We have added to our exposure in areas where we see greater earnings or growth visibility and resilience, where quality still holds, and where there is policy support. This has included positions in China in the renewable energy sector as well as stocks that are leveraged to the country’s localisation and self-sufficiency drive, such as stocks in the domestic tech or semiconductor supply chain. We have also increased our exposure to areas that are likely to do better in an environment of rising interest rates, such as banks, and resources producers, amid continued strength in commodity prices.”