Chinese Equities: Are We There Yet?

5 min read 17 Jan 23

Our views, in brief:

  • All of our portfolios have exposure to Chinese equities.
  • On a long-term view, we think the low valuations are attractive. Exposure to Chinese equities also provides diversification, as the country is grappling with different issues from developed markets.
  • We’re not adding more to China right now. The re-opening path may be bumpy, and other factors like the struggling real estate sector and geopolitical tensions are likely to hold back performance.

Our views, in detail:

We have exposure to Chinese equities in all our portfolios.  The key reasons for this long-term view are: (1) The economy is expected to grow at a faster pace than developed markets. (2) Inexpensive valuations are a good opportunity for long-term investors. (3) Inflation is not an issue – yet – with the December 2022 consumer price index registering a 1.8% rise1 in prices over the prior year.

China makes up about a third of the MSCI Emerging Markets Index, but it wields a much wider influence due to its close links with Asian economies. It’s also a driver of global economic growth, as a manufacturing base.

China’s economy was a bright spot in 2021, with 8.1% GDP growth as the country exited COVID restrictions sooner than the western world. However, the zero-COVID policy became a drag on growth in 2022, with rolling lockdowns across cities sapping consumer demand and industrial production. 2022 GDP growth was 3%2 and the MSCI China Index fell 21.8% in 2022.3

The equity market is off to a better start in 2023, with the MSCI China Index up 12% as of 13th January 2023.4 The rise has been driven by investors betting that lifting COVID restrictions will boost demand, as consumers spend their savings. This is on top of recent state policies to support the property sector.  Despite the recent strong performance, valuations of Chinese equities are still below global equities; the price to earnings ratio of the MSCI China Index is 13.6x while the MSCI All Country World sits at 15.6x.5

How could the market rise from here? First, Chinese companies could generate more profits, due to higher consumption. Second, investors could assign a higher value to Chinese equities, closing the discount to world equities. If both occur, it could lead to significant and sustained outperformance. 

We don’t think we’re there yet. The economic impact from reopening is hard to predict. The end of COVID restrictions was expected to come in gradual stages. It has come all at once. This has left nations wary – several countries have implemented testing requirements for travellers arriving and in response China stopped issuing visas for individuals from South Korea and Japan. There are also anxieties over the severity of the current COVID wave and how this will affect the healthcare system and social views. Consumers may restrict activity voluntarily, for fear of getting ill.

For now, we aren’t adding more exposure to China. We think the valuations of Chinese equities are fair, given the weakness in the real estate sector and geopolitical tensions with the United States. Those factors haven’t vanished like the COVID restrictions.

The greater impact for multi-asset portfolios may be in other asset classes, due to the global links of China’s economy.  Circa 10% of Europe’s exports go to China, so a rebound in demand could boost European companies.  China’s demand for oil is expected to rise, as travel increases within the country. The country is also one of the largest consumers of iron ore and copper.  Reopening could affect commodity prices and global inflation, as the demand increases. This impact would be highest in regions short of energy, such as Europe. 

1 National Bureau of Statistics of China
2 National Bureau of Statistics of China
3 Returns measured in USD. Data from Factset on 13th January 2023.
4 Returns measured in USD. Data from Factset on 13th January 2023.
5 Data is the 1yr Forward Price to Earnings Ratio, as calculated by Factset on 13th January 2023.

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