Hong Kong-China Equities: Navigating a Riskier Environment
The macroeconomic backdrop is challenging, and volatility is likely a given going forward, but visibility should gradually improve on the outlook for Chinese equities.
In China, there are a number of factors shaping the outlook for the economy. For one, the 20th National Congress of the Chinese Communist Party has provided more clarity on China’s senior leadership for the next five years. This should provide better visibility for the country’s government policies, including the introduction of meaningful measures to contain and support the property sector, as well as the potential for a roadmap for a gradual shift to open China’s borders to the rest of the world. With that said, these policies and their implementation could take months, if not quarters, to unfold. In the meantime, weak consumer sentiment will likely continue to weigh on domestic consumption. Additionally, China’s zero-COVID policies could potentially remain in place until the first half of 2023, as flu viruses tend to have enhanced transmittance during the winter season.
Outside of China, the risk of a recession in the U.S. and Europe is dampening demand expectations from developed markets. As a result, there could be further downward earnings revisions in the export-driven manufacturing sectors. At the same time, persistent elevated food prices, combined with OPEC price controls and Russia-related sanctions, are significant roadblocks to major central banks’ efforts to reach their inflation targets. This could mean a weaker global demand outlook and prolonged U.S. dollar strength, which tend to create an unfavorable environment for emerging market equities.
Select Opportunities Remain in the Near Term
In the near term, while ongoing volatility is likely—especially as companies report third quarter results—broader policy support in China is expected to be strong. In particular, China’s tamed inflation level means that the Chinese central bank could maintain its supportive monetary policy, and a cheaper Renminbi could help to offset weaker external demand. China’s delay in reopening its borders this year could also potentially defer its economic growth to 2023. Against this backdrop, investor sentiment around Chinese equities has been improving, especially with the asset class falling to historically low levels recently. In this volatile environment, and with share price corrections making valuations more attractive, we continue to see select opportunities to purchase high-quality companies at attractive prices.
We remain constructive on Chinese equities from a bottom-up fundamental standpoint in the near term, particularly due to the low base effect of the second half of 2021 on the back of easing policies. As the economy gradually normalizes, structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and ecological awareness, will likely continue to unfold. We believe these factors 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. That said, not all companies within these sectors are created equal. Ultimately, a bottom-up, fundamental approach to investing is crucial to managing risks and uncovering opportunities across Chinese equities.