China gets set for a promising Year of the Rabbit

As China leaves its zero-Covid policy behind and reopens to the world, its policy has shifted focus to driving economic growth. We believe the Chinese economy is poised for recovery and are positive about its outlook. The Year of the Rabbit may prove to be promising for Chinese and Hong Kong equity investors.

We expect to see a further boost in equity prices when China’s economic recovery is in full swing. For now, investors may want to re-examine their portfolios and consider adjusting their allocation to equities, so as to better capture the investment opportunities that China’s economic reopening may bring.

Chinese economy forecast to grow 5% in 2023

We expect China’s overall economy to stage a marked recovery as early as the second quarter of 2023. Meanwhile, the pandemic could still pose challenges and affect the momentum of recovery in the first quarter. Whilst economic growth might be temporarily hit, we believe China’s long-term recovery remains intact. With all factors considered, our current forecast sits at 5% growth for the Chinese economy in 2023.

Some sectors are expected to recover faster than others, especially those driven by domestic consumption or the notion of “internal circulation” introduced in China’s “dual circulation” economic strategy. We expect consumer spending to recover significantly in the second quarter. Though previously under pressure, the real estate market has been on track for a sustained recovery as China eases its policy restrictions for the sector, but we take the view that a full-fledged recovery is still some time away.

Owing to the potential risk of recession in Europe and in the US, external demand for Chinese goods may fall. In this regard, it would be wise for investors to keep track of China’s export performance in 2023.

The Hang Seng Index has experienced a strong recovery since China eased its Covid-19 restrictions, reflecting the strong correlation between the performance of the Hong Kong stock market and the Mainland Chinese economy. That being said, Hong Kong equities will likely benefit from China’s buoyant economic outlook. Overall, we maintain a positive view on Mainland Chinese and Hong Kong equities, but are seeing more investment opportunities within the A-shares market, given that Hong Kong stocks have already seen significant gains.

Continued optimism for sustainable investing and critical tech industries

In terms of investment themes, we remain positive about sustainable investing and low-carbon related sectors. These include, but are not limited to, companies within the new energy and electric vehicle value chains. As China seeks to be self-reliant in key technological fields, accommodative government policy and finances to support the semiconductor industry are expected to continue.

We have observed a shift in China’s regulatory stance towards the internet sector as authorities resume the granting of online game licenses to developers. This move might be a signal that regulations related to the technology industry are easing marginally. With that development in mind, we have revised our view on the Chinese internet and technology sector from neutral to positive.

As the Chinese economy gradually recovers, investors should still pay attention to the potential pressure of rising inflation, in which case market rates or policy rates will likely rise, thereby making bonds less attractive from an investment standpoint. Overall, we favour Chinese equities over bonds in that market, whilst maintaining relatively conservative about the latter. 

Asian bonds a means to reaping stable income

Nonetheless, we believe Asian bonds can be a means of reaping stable income. In view of a slowing economy in the US, many analysts are expecting inflation and interest rates to peak soon. On the other hand, Asian economies are expected to gradually recover following China’s reopening. Considering the divergences in economic cycles between Asian economies and those in Europe and the US, we believe that the days of the strong dollar might be numbered. Our expectation is for Asian currencies (including RMB) to strengthen against the US dollar going forward, which will enhance liquidity in Asian economies and increase the appeal of bonds in the region, especially those of investment grade.

Despite the improving outlook for China’s economic recovery, investors should keep an eye out for potential risks that are inherent in the investment markets. The progress toward herd immunity in Mainland China will be a factor to watch, as the results could determine the pace of the market’s recovery in 2023. 

All in all, we believe it would be wise for investors to maintain a diversified portfolio, and implement a bottom-up approach that analyses the investment value of a company in terms of its operations, capital expenditure and cash flow, among other factors. Taking such an approach can be effective in mitigating potential risks with the goal of achieving better investment returns. Simultaneously deploying top-down tactical asset allocations should enable investors to better capitalise on the Asia growth story in the Year of the Rabbit.