Hong Kong-China Equities: A Positive Long-Term Outlook

Chinese equities appear to be well-supported in the New Year. For instance, we expect to see a more supportive policy environment from the Chinese government this year, ahead of the 20th CCP National Congress. The Central Economic Work Conference has prioritized “stable growth” as the government’s key priority. Supportive monetary policy and fiscal spending are expected to be rolled out, starting with the reserve requirement ratio (RRR)-cut in December last year, which released approximately RMB1.2 trillion into the economy. Recent market focus on regulatory changes in new economy sectors, the real estate market and de-carbonization represent the government’s focus on development and a long-term agenda of economic transformation.

However, there are also some headwinds to economic growth in the near term. Sporadic COVID outbreaks in a number of Chinese cities have triggered travel restrictions and lockdowns, which will likely hinder consumption and domestic activity before the Chinese New Year. But given China’s high vaccination rates and reduced potency of Omicron, a disruption to domestic activities could be short lived.

From Diverging Policies to Digital Transformation

For the time being, the recovery across developed markets economies, and the impact Omicron is having on ASEAN countries, could result in higher demand for manufactured goods from China. At the same time, diverging monetary policies between the U.S. Federal Reserve and the People’s Bank of China would likely result in a softer RMB, which would provide support to export sectors.

COVID has also accelerated the global trend of digital transformation, which will likely be beneficial to Chinese companies—as they are core suppliers of hardware technology. Chinese companies boast some of the world’s advanced manufacturing technologies in semiconductors, acoustics, optics and sensors, which is hardware necessary for 5G and the Metaverse. This is one example of China’s gradual ascension in the global value chain.

A Constructive Outlook, with Near-Term Volatility

Looking ahead, we do not rule out the possibility that Chinese equity markets could continue to be volatile and reactionary to negative news flows in the coming quarters, as some of the previously announced policies are now being implemented. At the same time, we believe that periods of volatility can create opportunities to build positions in high quality companies that have returned to reasonable valuations. We also believe the recent regulatory policies, aimed at shaping the Chinese economy for long-term sustainable growth, could lead to new waves of structural opportunities. We are closely analyzing key areas illustrated in the 14th five-year-plan, such as the continuation of economic transformation toward sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and ecological awareness. This should bolster the outlook for sectors and themes such as new infrastructure, domestic consumption, health care, technology localization and sustainability in the medium to longer term.

We remain constructive on Chinese equities in the medium to longer term. We continue to find opportunities among quality companies that are well-positioned to benefit from ongoing structural reforms, technology innovations and consumption restructuring trends. As income growth continues, the demand for higher quality goods and services will also increase in China—and as a result, we remain constructive on leading domestic consumption companies that have a strong brand and pricing power, as well as companies that are capturing market share and benefitting from industry consolidation.