Hong Kong-China Equities: A Constructive View Despite Current Weakness
While economic recovery has slowed in recent months, this may prompt potential stimulus to support the Chinese economy and corporate earnings.
China’s post-COVID recovery lost steam in the second quarter in the absence of strong supportive stimulus, as regulators assessed the strength of the economy. Despite discretionary consumption continuing to recover and returning to near pre-COVID levels, industrial profits moderated from 2022 highs due to stagnant orders. With the manufacturing PMI in contraction territory for the third month, the current economic weakness is likely to prompt a concerted introduction of supportive policies in the coming months. Potential measures could include interest rate cuts, fiscal spending, tax incentives, property market easing, and investments in green infrastructure.
On the back of these supportive policies, as well as improvements in consumer confidence and the low base against which an increase will be measured, we expect economic activity to recover as these policies are instituted.
Progressive improvement supporting a constructive outlook
Although the near-term outlook in developed markets remains weak, inventories at Chinese companies continue to be worked down and are likely to hit bottom sometime in the second half of 2023. Geopolitical tensions with the U.S. are showing signs of marginal improvement with visits from senior U.S. officials to China, and, hopefully, recognition that regional stability anchored in ongoing dialogue is imperative to sustainable long-term development.
Due to differences in market expectations, we believe Chinese equities are currently attractively valued relative to developed markets and historical levels. In our view, the combination of supportive policy, marginally improving geopolitical tension, and recovery of domestic consumption could lead to a resumption of earnings growth and improved market sentiment. The large savings pool accumulated by Chinese households during the pandemic could also potentially transform into consumption and/or investments as sentiment improves.
We remain constructive on Chinese equities for 2023. Despite the weak macroeconomy in China, we are finding attractively priced, strong structural growth opportunities from a bottom-up perspective, which could positively contribute to our relative performance in the months to come. As the economy gradually normalizes, structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness, will likely continue to unfold. This should bolster the outlook on sectors and themes such as new infrastructure, domestic consumption, health care, technology localization and sustainability in the medium to longer term.
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