Is it finally time to take a proper look at the Chinese market?
After a fall of nearly 55% in the MSCI China Index between its peak in February 2021 and the middle of March this year, there are signs investors are starting to take an interest in the market again.
While the short-term outlook for earnings growth is still fairly poor, ‘we believe the structural long-term trends underpinning China’s growth story are still intact’ says Fidelity’s investment director for Asia Pacific ex-Japan Catherine Yeung.
Beijing’s zero-tolerance approach to Covid has led to sudden lockdowns in major cities like Shanghai which, while they have reduced the number of cases, have added to global supply chain disruptions.
However, these restrictions are now starting to ease just as the central bank is also easing monetary policy, albeit later than expected, which means economic momentum should pick up this year.
Meanwhile, infrastructure investment has remained strong and fears of a meltdown in the property sector seem to have passed.
While growth may not be that dynamic, there is plenty of valuation support for large parts of the market including industrial, basic material and financial stocks says Yeung.
There are two further factors which could sway investors to take another look at the markets in coming months.
First, the government appears to be rowing back on its crackdown on technology stocks in the run-up to the Party Congress in October so as not to rock the boat with consumers.
News this week that Chinese investigators were close to wrapping up their investigation into Didi Global sparked a huge rally in the ride-hailing firm’s shares.
Second, it appears US president Biden’s team is considering rolling back the previous administration’s tariff hikes on some $300 billion of Chinese imports.
As well as being positive for the Chinese economy, scaling back some of the duties would likely help limit US inflation in products ranging from steel, aluminium and chemicals through clothing and footware to aircraft parts and semiconductors.