In the first month of 2022, onshore Chinese equities tumbled on the back of the more-hawkish-than-expected US Fed, likely limiting the room for monetary easing in China. Although there were rate cuts in China, they were largely expected by the investors and therefore did not really help reversing the weak sentiment. In light of the faster than expected monetary tightening in the US, we saw rotation from growth to value/high-yield names. CSI300, which has a strong tilt to value and high yields, outperforming CSI500 and CSI100. Sector wise, the top three by return were financials, real estate and telecom. Bottom three performers were healthcare, I.T. and utilities.
The recent A-share corrections were mainly fueled by concerns over downward pressure on GDP growth owing to physical property sector deleveraging, and most recently likely faster and greater than expected Fed rate hikes ahead. Overall sentiment was also impacted by the lingering Covid situation in China.
Looking ahead, markets continue to hope for more aggressive signs of monetary or fiscal stimulus in China, which would be key to an improvement in sentiment for Chinese equities. In particular, a reversal in fiscal tightening, further monetary policy easing and renewed credit growth, as well as more relaxed industry regulatory scrutiny could lead to a sharp improvement in sentiment towards the market.
Given the uncertain and rapidly evolving regulatory backdrop we are treading carefully in the most exposed industries but will look to increase exposure to preferred names in the market that we feel have been unfairly caught up in the current down draft.
Looking ahead, we believe upside optionality will mainly be the potential re-opening in China in 2022, which should underpin consumption recovery. Producer price inflation may peak next year thanks to the normalisation of industrial activity and improvements in supply chains globally, alleviating the margin pressure on mid and downstream players. We expect new infrastructure and green-related capital investment to be key areas of growth. Traditional infrastructure investment may also increase modestly on the back of more supportive fiscal policy. On the other hand, the slowdown in property investment is likely to continue.
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