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The previous year was dismal for China equity markets, which saw an exodus of foreign money as zero-Covid curbs hit investor sentiment. However, fund managers are now becoming optimistic about China equity after Beijing decided to roll back some of the Covid restrictions.
Equity markets in China have also suffered the brunt of the fallout in the real estate sector, and the regulatory scrutiny of technology companies. Both these issues are now showing signs of easing after the Chinese government issued new directives.
China’s equity outlook is turning bright with a slew of measures announced by the government, but what could be the potential factors that influence the equity market going into 2023?
China equity in 2023
Equity markets in mainland China and Hong Kong saw combined losses of $3.9 tn in 2022, as per Bloomberg estimates. The new year is likely to be a better year for China, as the country focuses on economic revival and supports the property sector.
“We expect China’s economy to stage a recovery in 2023, although we think exports are likely to contract in 2023. This is because we expect many developed market economies to fall into recession as high inflation and interest rates choke off demand,” as per David Rees, Senior Emerging Markets Economist, at Schroders.
Dwindling exports and weak factory output are major concerns for China. Exports out of China plunged 8.7% YOY in November 2022, up from a fall of 0.3% in the previous month. China’s factory activity saw a slump in December, with the Caixin/Markit manufacturing PMI falling to 49.0 in December from 49.4 in November. A number below 50 indicates a contraction in the sector. Separately, official data showed that China’s factory activity was down for a third straight month in December.
However, mainland China equities may rally now that Covid curbs have been eased as corporate profits rise with increased economic activity.
“China’s corporate profits were suppressed in 2022 due to Covid and the property decline. However, we think they might have troughed. Consensus is expecting China’s 2023 earnings per share (EPS) growth to accelerate to 10% from 2% in 2022. On the other hand, global EPS growth (MSCI ACWI) is expected to decelerate from 7.5% in 2022 to 3.7% in 2023,” says Wenli Zhang, Portfolio Manager, T.Rowe Price.
Additionally, fund managers are of the opinion that China equity now commands some of the most attractive valuations.
“The opportunity is all the more compelling thanks to very attractive valuations, with China ranking as the second cheapest equity region in our model,” says Pictet’s Chief Strategist Luca Paolini.
As the country reopens, Invesco sees opportunities in the consumer-related, healthcare and internet companies as domestic demand recovery helps the sectors.
The property market is likely to make a turnaround as China is extending fiscal support to developers and has turned away from its deleveraging campaign.
China’s technology supply chains have been hit by rising Covid cases, but Beijing has now reined in its regulatory scrutiny. In the most recent development, Jack Ma’s Ant got approval for $1.5 bn fundraising. Separately, the video game regulator granted 70 approvals to games late last year, with Tencent receiving the first go-ahead after nearly 18 months.
Geopolitical issues are also showing signs of easing after President Xi Jinping met his US counterpart last year, but volatility is likely to continue as trade sanctions are still intact. Meanwhile, the country’s chip sector is reeling from the sanctions placed by the US, severely crippling Beijing’s ambitions in the semiconductor industry.
“When evaluating the opportunity set in China equity, it is important to bear in mind the potent incentives for both the US and China to maintain a collaborative ongoing relationship, given the substantial capital market, supply-chain, and trade interdependencies between the world’s two largest economies,” said Bo Meunier, Equity Portfolio Manager, at Wellington Management.
