Hong Kong-China Equities: A Constructive Outlook, Despite Volatility

In China, the central government is currently maintaining its “zero tolerance” policy on COVID in order to ensure a safe and orderly reopening. Indeed, these lockdowns have caused disruptions on domestic consumption and certain manufacturing activities—but supportive policy is expected to help businesses overcome the current challenging times. Eventually, the COVID overhang could gradually subside as mRNA vaccines and oral drugs become sufficiently rolled out in China, but this will likely take time to unfold. At the same time, China’s 2022 “Two-Sessions”—an annual political gathering which took place in March—set the country’s GDP growth target for this year at approximately 5.5%. Achieving this target will likely necessitate further monetary and fiscal stimulus, especially given the ongoing lockdowns across the country. 

Elsewhere, the inflationary pressure exacerbated by the geopolitical tension will likely remain as another key factor in the coming months—in particular, given that China is a major importer of various commodities. Upstream producers and companies that are able to pass on the costs to their customers may stand to outperform the broader market. The diverging policies between the People’s Bank of China and the U.S. Federal Reserve (Fed) also present a softer outlook for the RMB, which is beneficial for export-oriented industries.

A Supportive Backdrop for Chinese Equities
Going forward, the Chinese equities market will likely remain vulnerable to volatility due to the fragile investor sentiment. However, we believe that current market valuations have priced in most of the downside risks. We also expect to see further stimulus measures rolled out to provide support to the Chinese economy and markets. In addition to this, the recent regulatory policies, which are aimed at driving long-term, sustainable growth in China, could lead to new waves of structural opportunities. As a result, we have taken advantage of the recent market volatility to build positions in high quality companies that have returned to reasonable valuations. 

We remain constructive on Chinese equities driven by bottom-up fundamentals, in particular due to the low base effect of the second half of 2021 on the back of easing policies. As the economy gradually normalizes, structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and ecological awareness, will likely continue to unfold. We believe that 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. At the same time, a number of Chinese companies are benefiting from the global economic recovery, including manufacturers of goods and shipping companies.