Invest in China smartly

The Chinese economy began showing signs of recovery in May and June 2022, with the latest key economic indicators such as manufacturing PMI, new lending, and exports all seeing meaningful improvements. As such, we remain cautiously sanguine about China’s economic outlook, and growth and income opportunities within.

Manufacturing is set to be a key engine of economic recovery and will to some extent offset weaker consumption growth. Because of this, we expect economic expansion to accelerate in the second half of 2022, after a sluggish first half due to Covid-19 containment.

China’s monetary policy

From a global asset allocation perspective, China is in a different stage in the economic cycle and is among the few major economies that has loosen monetary policy for the time being.

Relatively milder inflation in the market allows more room to manoeuvre monetary policy – and for potentials cuts to the reserve requirement ratio and interest rates.

The People’s Bank of China may ease further by injecting liquidity into targeted sectors to avoid flooding the financial markets.

China equity market outlook

Considering an improving macro economy and looser monetary policy, we think China is one of the bright spots among global equity markets. With this view, we turned more positive on China stocks more recently.

There are four reasons for this: China stocks are relatively undervalued, and retail investor sentiment in A-shares remains healthy. The expectation for loose monetary policies domestically would also help. Lastly, the launch of the Shanghai, Shenzhen Hong Kong Stock Connect programmes have increased and will continue to increase cross-border liquidity. We believe China’s equity market would likely rebound based on that rationale.

Investment themes to watch

Looking at investment themes, we remain positive on sectors related to sustainability and green development. These include renewable energy and electric vehicles. Green infrastructure investment is expected to be a top policy priority – and will bolster the wind, solar and hydro power industries.

Investors should also keep an eye on smart city and IT innovation-related sectors – such as semiconductors, and advanced manufacturing and materials.

The consumer industry is another investment theme that’s on our radar. China is home to over 1.4 billion and domestic demand is a driving force. The introduction of the “Common Prosperity” policy has supported the growth of the middle class, thereby giving a boost to mass consumption.

Balancing investment risks & rewards

Persistent inflation in the US and worldwide may increase concerns about a prospective global economic recession and put pressure on equity markets. Under such an environment, investors may consider adding hedging instruments to their portfolios to balance risks.

China bond market outlook

Overall, China’s fixed income market presents attractive opportunities, particularly currently for higher-quality, investment-grade bonds, which can provide more stable income with the benefit of diversification. Nevertheless, credit analysis and therefore risk is still at the forefront of consideration, especially in the high yield sector where some headwinds may persist.

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