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China is all set to welcome the Lunar New Year, and investors are keen to know what’s in store for them this year. Tradition says that the ‘Year of The Dragon’ signifies wisdom, good luck, prosperity, and strength, and the market is awaiting positive developments in the world’s second-largest economy. The nation has been dealing with economic issues for the past two years. Against this backdrop, asset managers highlight whether the Year of the Dragon 2024 can bring fruitful opportunities for investors.
Focus on long-term growth, a key investment strategy
Eastspring Investments tells investors to ‘Ride the dragon to prosperity’ by not timing the market and staying invested even in volatile times. “It is better to stay invested and ride the market through volatile times to benefit from the market’s long-term growth potential,” suggests the asset manager.
According to Eastspring, a dragon symbolises hidden opportunities. Hence, the asset manager recommends investors look at stocks with untapped prospects of significant growth and returns early on. “These overlooked stocks offer a promising investment opportunity for early investors before the wider market gets wise to the fact.”
On the other hand, Allianz Global Investors believe that such opportunities exist in depressed valuations. “The MSCI China A Onshore Index trades close to 11x forward PE, well below longer-term average levels (Bloomberg, 13 December 2023). This should, in the worst case, provide some downside buffer. And in a more optimistic scenario, where China proves itself to be more economically resilient than expected, then this could trigger a meaningful rerating,” elucidated William Russell, Head of Product Specialists Equity AP at Allianz GI.
Meanwhile, UBS Asset Management has a positive long-term outlook for Chinese equities and predicts that the return from Chinese equities would outpace that of global equities.
“Our five-year capital market expectations point to prospective returns of 8.2% per annum for Chinese equities, well above the 6.3% estimate for global equities or 4.2% forecast for US large-cap stocks,” highlights Sylvia Liang, Research Analyst at UBS AM.
Innovative and nascent sectors to fuel economic growth
On a pragmatic note, Allianz GI believes, “While China’s structural problems are very real, extrapolating the current bout of economic weakness as the new status quo is nonetheless likely to be as misguided as the unbridled optimism just three years ago.”
Echoing the same, Evan Brown, Head of Multi-Asset Strategy at UBS AM, states, “The multi-decade period of high growth has come to an end for China, but the opportunities for investors have not.”
He feels that China must overcome the challenge of transitioning from its “credit-fuelled, property-centric growth model” to sectors focussed on growth and innovation.
Brown is upbeat about the potential of sectors like home appliances, consumer electronics, and electric vehicles. He also highlights lesser-known “niche” factors like radio-frequency communication, hydrogen and ammonia, and synthetic biology and photonic sensors that can fuel growth in strategic sectors like power, life sciences, and communication.
The Year of the Dragon to unleash China’s inherent strength?
Market observers believe in the fundamental strength of the Chinese economy despite all the drawbacks. Andy Rothman, Investment Strategist at Matthews Asia, says that although the Chinese economy is weak, it is not in crisis. He attributes much of the weakness in the economy to flawed policymaking and implementation.
“I believe confidence can be restored if Beijing takes steps that convince entrepreneurs and households that the government is getting out of the way of business, is fully supporting the private sector and markets, and is creating a more transparent regulatory environment,” opined Rothman.
According to Peiqian Liu, Asia Economist, Fidelity International, “Our base case for The Year of the Dragon is that China will experience a phase of controlled stabilisation, with relatively stable GDP growth between 4-5%, while it continues to address and resolve long term structural challenges.”
Liu foresees no deflation but moderate inflation pressure amid cyclical recovery gaining momentum. She also predicts a release of pent-up demand in consumption and services and a gradual pick-up in policy momentum in 2024.
While China has much to offer investors despite its structural challenges, the short-term risks due to an existing economic slowdown cannot be overlooked. Hence, Alessia Berardi, Head of Emerging Macro Strategy at Amundi Asset Management, cautions, “From an investment standpoint, the shift toward a more sustainable growth model presents long-term opportunities in Chinese assets, but it also calls for increased selectivity in the short term to cope with the economic slowdown.
