2023 Investment Outlook – China equities

More positive than negative?

China's potential reopening

While China's zero-Covid policy has saved lives, the strict restrictions have dampened China's growth. We are of the view that the world's second-largest economy will reopen in 2023. We believe that top leadership transition is a significant precondition for reopening. As the new Politburo members have been announced at the 20th Party congress, we are now one step closer to the end of China’s zero-Covid policy. 

We anticipate a gradual, cautious, and well-planned reopening with a lead time of up to a few months once the decision has been made. Signals we can look for in gauging the reopening timeline include a change in the public narrative regarding Covid's public health implications, efforts to boost the vaccination rate, especially among the elderly, and planned international events.

We expect the reopening to be positive for domestic demand and may likely benefit service sector industries. More importantly, we anticipate a substantial boost to consumer sentiment. Consumer sentiment has plunged significantly since the zero-Covid policy was implemented and China’s Consumer Confidence Index read below 90 as of Q2 2022.¹ At the same time, Chinese consumers have wealth to spend and recorded GDP per capita in 2021 was roughly US$11,100.² Potential beneficiaries from the reopening include consumer discretionary, staples, healthcare, and Internet sectors.

Economic development is a key priority

Against the backdrop of the zero-Covid policy, China has emphasized the importance of economic development and focusing on high-quality, balanced, and inclusive growth. While there may not be a short-term concrete growth target, policymakers aim for China to become a "moderately prosperous" society by 2035. We anticipate a strengthening of accommodative policies through both fiscal and monetary channels in order to support economic growth and tackle downside risk. Looking ahead, we expect regulators to target a reasonable growth rate of around 5%. This could prove to be a supportive environment for bottom-up stock selection. 

Re-rating of the Internet sector

Policymakers have shown signs of easing the stringent regulations that have been implemented in the Internet sector over the last two years. For example, government officials have pledged to support the Internet sector and put an end to the suspension of new game releases. We believe most of the crucial implementation issues with regards to Internet regulations have now been ironed out and the worst of the regulatory reset is over. In our view, valuations already reflect most of the negatives arising from regulatory risk, and the sector may soon revert back to a structural growth mode. Given the potential for structural growth opportunities, we hope to see a re-rating in this sector. 

Technology localization opportunities

US-China trade tensions have recently intensified given the ban on semiconductor and supercomputing exports to China. This poses challenges to China's semiconductor industry in the near term. We may see secular growth potential given supportive government initiatives to the semiconductor industry as well as the relocation of semiconductor production given trade tensions. Going forward, we expect China to increase its domestic semiconductor production capacity in order to cut dependency on foreign imports. This would include chip design, manufacturing, and packaging. As a result, we believe that leading companies in the technology sector with limited impact from trade tensions and increasing capacity can present potential investment opportunities. 

Attractive valuations and supportive liquidity 

We believe cheap valuations provide a window of opportunity for investors looking to invest in Chinese equities. Both Chinese onshore and offshore equities are currently priced at historically low levels. MSCI China and CSI 300 were trading at around 9.6x and 10.9x 12-month forward P/E as of the end of September, respectively³, around the low end historically and at a significant discount to developed market equities. 

At the same time, the liquidity of the domestic financial market is currently at a historically high level, safeguarding the stability of the money supply and Renminbi. We are positive about the potential for earnings growth and the speed of recovery of the financing activities as market sentiment towards China gradually improves. 

We believe there are ample opportunities in both onshore and offshore China equity markets, including consumer-related, healthcare, and Internet companies that can benefit from domestic demand recovery and China’s potential reopening. In addition, we believe that green economy and manufacturing sectors could benefit from cost advantages given China’s dual circulation model.

With contributions by Chin Ping Chia, Managing Director, Head of China A Investments and Kehong Jiang, Associate Director, Investments.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.