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In the first half of 2023, a lot has happened in China’s financial markets. What is China’s forecast for the second half of this year? This is what investment experts are saying regarding the China Outlook.
China Economy
China’s reopening and recovery could nearly double GDP growth to 5.7% in 2023, bolstering regional cyclical strength, as per Morgan Stanley. “We expect growth reacceleration in the second half of this year after a hiccup in the second quarter, thanks to renewed stimulus and new employment in services bolstering private consumption,” says Morgan Stanley’s Chief China Economist Robin Xing.
“Exports have also been a key driver of growth recently…However, it is likely that exports will slow down in the second half of 2023 as the cooler global economic environment will have an impact,” writes Kevin Kang, Chief Economist at KPMG China. According to Kang, a major headwind for the Chinese economy can be its real estate market, which has improved from the low base of 2022.
Jacqueline Liu, Equity Research Analyst at T. Rowe Price, believes that the recent weakness in China’s macro data is more likely to be a temporary hiccup than a major trend that could derail 2023’s recovery trajectory. “We anticipate a gradual but more broad‑based economic recovery for the rest of the year and into 2024, with some bumpiness expected due to the volatile base, uncertainties in the external economy, and geopolitical tensions,” writes Liu.
“The momentum in China’s economy slowed after the initial post-zero-COVID rebound, but more aggressive stimulus may be forthcoming to reinvigorate the recovery,” says Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab.
China Equity
Geopolitical tensions did not appear to have significantly affected China’s domestically generated economic growth, but it has had an impact on the Chinese stock market in 2023, according to Charles Schwab’s outlook for China.
“The pause in international stock market leadership in May could resume in the second half of the year. Yet, the global stock markets’ double-digit returns in the first half may already reflect expectations of an end to the Cardboard Box Recession,” says the asset manager.
M&G Investments claims that despite weaker-than-expected headline growth, several significant Chinese companies are performing well in terms of margins and profitability.
“…and we are seeing many companies returning cash to shareholders in the form of buybacks. While we wait patiently for market dislocations, we continue to like companies exposed to long-term themes that we believe will continue to attract capital even in a global demand slowdown: infrastructure, innovation…and the low carbon ecosystem,” writes Fabiana Fedeli, Chief Investment Officer, Equities and Multi Asset at M&G Investments.
Eastspring Investments contends that potential earnings upside and further investor inflows should be supportive of the Chinese equity market.
“The China A-share market is flat for the year and valuations are currently not expensive. We continue to be optimistic about the opportunities in China’s high-end manufacturing industry including medical equipment and semiconductors, which are in line with the government’s goal of achieving technological self-independence,” says the asset manager.
“At current valuations of under 10 times forward earnings, recent disappointing market performance appears overstated as potential for a substantial and sustained economic recovery remains,” opines Citi Bank.
China Bonds
The Chinese bond market has suffered considerable outflows in 2023 due to growing yield discounts on China 10-year bonds versus similar maturity US treasuries, as per Deutsche Bank. However, according to it, experts believe flows into RMB bonds could resume later this year if yields rise off the back of inflation and economic growth.
Moving to Chinese high-yield bonds, Standard Chartered says that the China outlook for the sector remains mixed. “Chinese property bonds, which contribute one-third of the segment, remains under pressure from sluggish industry recovery and idiosyncratic risk,” it adds.
“High yield bonds (HYs) posted more muted returns and continue to be pulled down by poor China real estate sentiment. The recovery in China’s property sector still has some way to go both in terms of physical demand and developers gaining access to sufficient financing. HYs continue to see a deterioration in credit ratings,” says Eastspring Investments.
On the risks involved in investing in China, JP Morgan Wealth Management says: “Of course, investing in China comes with greater risk than investing in many developed markets. But we think certain investors could reap a higher reward for taking that risk in the second half of the year.”
