The MSCI China Index fell 55%1 from February 2021 to March this year but has rallied 13% since early May1. Cumulative foreign equity flows into the China A-shares market recently turned positive, hitting USD4 billion. See chart. As mentioned in our 2022 Mid-Year Outlook, we believe that the Chinese economy likely bottomed in the second quarter of 2022, and policies to stabilise and boost growth should be positive for the China A-shares market.
Eastspring’s Multi-Asset Portfolio Solutions team notes that China’s high frequency data such as car sales, mobility trackers, oil refinery run rates and truck transportation have rebounded in June. There is even some positive news for the property sector with smaller month on month declines in home sales, new home prices and mortgage loans. Regulatory headwinds also seem to be abating with reports suggesting that the cybersecurity probe on Chinese internet companies is likely to be concluded soon. Chinese regulators have also been gradually issuing more gaming licenses, a step towards normality. Greater stability in China’s tech and property sectors would be key in lifting employment. Against this improving backdrop, it helps that the China A-shares market’s valuations are attractive at 10x 12-monthy forward price to earnings3. Meanwhile, global funds have trimmed their allocations to Chinese equities in the last 12 months – hence positioning is seemingly light and has room to grow.
Cumulative equity flows – 2022 (USD bn)
According to Michelle Qi, Eastspring Shanghai’s Head of Equities, the pace of China’s economic recovery would depend on China’s zero-COVID policy, its control and mitigation methods as well as the degree of spill overs. A steady emphasis on pro-growth policies is key to boosting consumer confidence and she points to still weak retail sales and credit demand as signs that consumer confidence in China remains fragile. Given the potential for disappointments in the second quarter’s earnings results, she continues to advocate a dynamic and selective strategy when investing in the A-shares market. Over a medium to long term perspective, Michelle favours the high-end manufacturing sector which should benefit from increasing domestic substitution, as well as the new energy, consumer and medical services sectors which are likely to enjoy higher structural demand.
Footnotes
Sources:
1 19 February 2021 – 18 March 2022. Bloomberg
2 10 May 2022 – 20 June 2022. Bloomberg.
3 CSI 300 Index. As of 21 June 2022. Bloomberg.
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