Public Equities

Hong Kong-China Equities: A Constructive View Despite Current Weakness

July 2023 – 2 min read

While economic recovery has slowed in recent months, this may prompt potential stimulus to support the Chinese economy and corporate earnings.

China’s post-COVID recovery lost steam in the second quarter in the absence of strong supportive stimulus, as regulators assessed the strength of the economy. Despite discretionary consumption continuing to recover and returning to near pre-COVID levels, industrial profits moderated from 2022 highs due to stagnant orders. With the manufacturing PMI in contraction territory for the third month, the current economic weakness is likely to prompt a concerted introduction of supportive policies in the coming months. Potential measures could include interest rate cuts, fiscal spending, tax incentives, property market easing, and investments in green infrastructure.

On the back of these supportive policies, as well as improvements in consumer confidence and the low base against which an increase will be measured, we expect economic activity to recover as these policies are instituted.

Progressive improvement supporting a constructive outlook

Although the near-term outlook in developed markets remains weak, inventories at Chinese companies continue to be worked down and are likely to hit bottom sometime in the second half of 2023. Geopolitical tensions with the U.S. are showing signs of marginal improvement with visits from senior U.S. officials to China, and, hopefully, recognition that regional stability anchored in ongoing dialogue is imperative to sustainable long-term development.

Due to differences in market expectations, we believe Chinese equities are currently attractively valued relative to developed markets and historical levels. In our view, the combination of supportive policy, marginally improving geopolitical tension, and recovery of domestic consumption could lead to a resumption of earnings growth and improved market sentiment. The large savings pool accumulated by Chinese households during the pandemic could also potentially transform into consumption and/or investments as sentiment improves.

We remain constructive on Chinese equities for 2023. Despite the weak macroeconomy in China, we are finding attractively priced, strong structural growth opportunities from a bottom-up perspective, which could positively contribute to our relative performance in the months to come. As the economy gradually normalizes, 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 on sectors and themes such as new infrastructure, domestic consumption, health care, technology localization and sustainability in the medium to longer term.


William Fong, CFA

Head of Hong Kong China Equities

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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