Hong Kong-China Equities: Early Signs of Economic Stabilization

The near-term outlook for Chinese equities looks relatively constructive, thanks to an improvement in fundamentals, attractive valuations, and supportive policies. In particular, China’s economic activity also stabilized with manufacturing PMI returning to positive territory in September, and industrial output and retail spending data also show signs of improvement. Traffic flows and spending during China’s October Golden Week holidays have mostly recovered to pre-COVID levels, suggesting increasing interest for consumption. In addition, the savings pool accumulated by Chinese households during the pandemic could transform into consumption as forward-looking visibility improves. At the same time, the potential plateauing of U.S. interest rates could provide support to emerging markets.

That said, risks remain on the horizon. For instance, while we continue to expect the policy environment in China to be supportive, with a series of policies introduced in the third quarter this year, the government could potentially pause to assess the overall impact they’ve had on the economy. Weakness in the property sector also continues, with credit risk prevalent among private developers. Meanwhile, the economic cycle is expected to bottom before year end, and lighter inventories of consumer companies should support corporate earnings growth in the coming months on the back of a low base—which is key for a recovery in investor confidence.

Valuations Appear Attractive

Although the near-term outlook in developed markets remains uncertain, the U.S. economy has shown signs of marginal improvement with a soft landing scenario on the horizon. The launch of a quasi-5G phone by a major U.S.-sanctioned Chinese company, which indicates a breakthrough in China’s advanced semiconductor manufacturing capabilities, could potentially tone down further sanctions. China also remains one of the world’s largest markets for hardware technology within the global supply chain. Although U.S.-China tensions remain, official dialogue may help to anchor expectations, with the potential for President Xi and President Biden to meet in November.

For now, market sentiment remains somewhat skeptical on Chinese equities, with valuations appearing attractive compared to historical levels and against broader global markets. If investors can remain patient, we believe this backdrop is presenting an attractive entry point for longer term investors.

As the economy gradually recovers, we are seeing attractively priced, strong long-term growth opportunities emerge. Structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness, will likely continue to unfold. This should bolster the outlook for companies with exposure to sectors and themes such as new infrastructure, domestic consumption, health care, technology localization and sustainability in the medium to longer term.

23-3191407