PERSPECTIVE3-5 min to read

Common prosperity is not a zero-sum game



Jason Yu
Head of Multi-Asset Management, Asia

The Chinese central government is taking decisive measures to support the domestic economy. According to official PMI data, local business activities have shown significant recovery within just a month after the China’s reopening in December 2022 with manufacturing activities also expanding. During the period, China’s stock market picked up and experienced a double-digit rebound. Early signs have shown that investor and consumer confidence is returning, which is likely a key indicator of China’s economic recovery ahead.

Policy-wise, there has been a series of encouraging developments for investors. Besides the relaxation of zero-Covid measures that has released pent-up consumer demand, marginal easing of tech-related regulations has also helped stabilise the market.

Meanwhile, authorities are proactively introducing measures to channel funds into the real estate market while addressing liquidity risks among developers. Having said that, we believe the worst has passed for China’s real estate market.

Positive outlook for corporate earnings

Despite a milder regulatory environment, the market may still have concerns about whether China’s “common prosperity” policy signals a return to the planned economic model.

In our view, the “common prosperity” policy is not a zero-sum game, which will not target specific industries for reallocation of resources. Instead, resources are expected to be channeled into industries that are closely related to China’s tech self-reliance strategy, such as semiconductors and computer chips, and under the condition that this process does not affect the development of existing industries. After all, the purpose is to build a more balanced economic framework for China.

As the confidence in the Chinese economy recovers, spillover effects from economic pickup may provide some support for surrounding economies, such as Hong Kong and Macau.

Overall, with domestic consumption being one of the main considerations, we are positive about the outlook for corporate earnings. China’s excess household savings will be a key driver of domestic demand recovery. We see more upside potential for sectors such as consumer services, consumer staples and tourism in the coming quarters, and are also upbeat on the medium- and long-term outlook for domestic semiconductor and computer chip companies.

Market recovery bodes well for the offshore bond market

In view of fading market risks, we are more positive about mainland Chinese offshore corporate dollar bonds, which we believe will provide decent returns for investors. However, the expectations for US rate hikes are likely to sway investor sentiment on the offshore bond market in the short term. In fact, inflation and employment expectations in the US have strengthened recently. Rate hike expectations will drive capital flows into markets with higher interest rates, which may lead to capital outflows from the mainland Chinese corporate dollar bond market. Therefore, investors will closely monitor inflation and labour market data from the US in the months to come.

Maintain the balance between Asia equities and bonds

Nonetheless, we see no cause for excessive worry for investors. At the end of the day, it is the economic fundamentals that determine capital flows. Currently, our basic forecast is still that inflation in Europe and the US will be controlled. We also expect capital to return as the Chinese economy continues to recover and interest rates and inflation in the US peak.

From a multi-asset allocation perspective, we currently hold a relatively balanced view on Asian equities and bonds. We also remain positive about the performance of Asian equities in 2023. By allocating assets dynamically in a flexible manner, we believe investors will be in stronger positions to achieve better returns and yields in 2023 as they navigate the complicated and ever-changing market environment.

Last but not least, we believe commodities can play an important role in investment portfolios. With the recovery in China’s economy and its real estate sector accelerating, demand for petroleum and industrial metals will likely climb and prop up commodity prices. While the current geopolitical risks may not necessarily escalate into more widespread conflicts, they are likely to affect market sentiment in the short term. Under these circumstances, we believe gold can act as a safe haven and help investors hedge against some risks.

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Jason Yu
Head of Multi-Asset Management, Asia


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