Hong Kong-China Equities: Opportunities Remain, But Volatility Ahead
An economic reopening and supportive policies are creating a constructive backdrop for Chinese equities—but volatility is set to remain in the near term.
China’s economic reopening is set to be a strong tailwind in the months ahead, supporting growth and the Chinese economy. Although the recent surge in COVID cases had initially stalled domestic activities in December, the general public is gradually obtaining immunity to the virus, and a reversal of the reopening policies appears to be unlikely. In addition, consumption is expected to recover owing to pent-up demand and rising household savings since 2020. As a result of these factors, a normalization path similar to the rest of the world is likely to unfold in China in the coming months.
On the policy side, the Central Economic Work Conference, held in December, reaffirmed the Chinese government’s position to support “stable economic growth”. And in the next few months, the upcoming “Two Sessions” are expected to provide further regulatory continuity after the 20th CCP National Congress, paving the way for additional pro-growth policy implementation. We have seen the gradual relaxation of restrictive policies introduced since the pandemic—from those impacting internet/platform companies in early 2022, to the economic reopening and support for property developers in late 2022. Monetary policies are also expected to remain supportive, contingent on a more moderate level of inflation.
Outside of China, the economic outlook in developed markets may remain soft in the coming months, suppressing expectations for external demand and export-driven manufacturing sectors. However, as inflation levels continue to moderate, a peak in U.S. Federal Reserve interest rates could be closer—representing conditions which are typically beneficial for emerging market equities.
Finding Opportunity in a Volatile Market
While volatility is likely to remain elevated in markets going forward, especially as companies report their fourth quarter and annual earnings results, investors are gradually shifting their focus toward growth in fundamentals in 2023. Both valuations and earnings across Chinese companies have been deeply suppressed due to China’s regulatory tightening and the COVID-related lockdowns, while China’s delay in reopening its borders in 2022 could mean deferring its growth to 2023. We believe these factors are creating a potential favorable opportunity to enter the market. Against this backdrop, we have taken advantage of the recent market volatility to build positions in high-quality companies that have returned to reasonable valuations.
From a bottom-up fundamental standpoint, we remain constructive on Chinese equities in the year ahead, in particular due to the low base effect since 2021 and on the back of strongly supportive policies. 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. In our view, 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.
23-2707760
