Hong Kong-China Equities: All Eyes on Policy

Since its post-COVID reopening in 2023, China’s economic recovery has been weak with government policy support below market expectations. Looking at the year ahead, we expect the focus of policies to shift from stabilization toward growth—and the official GDP growth target announced in March’s National Congress will likely set the tone for this year. At the same time, we expect the Chinese government to take a more coordinated approach across various government agencies, to ensure efficient utilization of capital and policies, as well as to turn around the deflationary environment.

We expect that monetary policies and domestic liquidity will continue to be supportive. However, capital has not been efficiently deployed throughout the economy—a key area for the government agencies to improve in the year ahead. We are monitoring the impact of recently launched policies, such as the relaxation of purchase qualifications for properties, as well as new initiatives aimed at stimulating consumption. For now, part of our portfolio is positioned toward defensives and yield-generating assets, both due to their lower volatility and attractive current valuations.

Market Opportunities

In the U.S., moderating inflation and a strong labor market have set the stage for a likely soft-landing scenario this year. This suggests that global central banks now have the flexibility to tailor their monetary policies based on their domestic conditions, which is typically supportive for global economic growth. Against this backdrop, we are constructive on the Chinese manufacturing companies that have a significant presence in the export market. At the same time, the potential for U.S. interest rate cuts this year could result in a marginally weaker U.S. dollar, which should be supportive for investments and revenues from non-U.S. markets.

For now, market sentiment remains somewhat skeptical on Chinese equities, with valuations appearing attractive compared to historical levels and against broader global markets. If investors can remain patient, we believe this backdrop provides an attractive entry point for longer term investors.

As the economy gradually normalizes, we are seeing attractively priced, strong long-term growth opportunities emerge. 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 for companies with exposure to 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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