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In recent years, China’s economy has experienced challenges that have led to its divergence from the historically high GDP growth rates. Following the country‘s economic growth of 5.2% in 2023, the most sluggish expansion rate since 1990, excluding the pandemic years, the government has set a target of 5% GDP growth for the current year.
As per UBS Asset Management, this modest government target reflects demographic shifts, declining return on invested capital (ROIC), and challenges in artificial intelligence (AI) development. Faced with this, the asset manager also highlights that Chinese stock markets have descended to their lowest levels since the Covid-19 pandemic.
“But we think that investors’ macroeconomic focus is misplaced. The macroeconomic cycle is just one of four key cycles in China, each of which offers structural alpha opportunities both long and short,” writes Jia Tan, Head of Research, China Equity Long/Short at UBS O’Connor, an investment area within UBS AM.
“A long/short approach potentially captures a differentiated source of returns and complements a beta-driven strategy while improving risk-adjusted returns across different market cycles,” he adds.
Talking about the economy, Tan contends that China’s inventory cycle suggests that the nation is approaching the trough of its destocking cycle, potentially boosting the job market and consumer activity as companies rebuild inventories. According to UBS’s Head of Research, this cycle presents opportunities along the supply chain.
The Head of Research also pointed out that the difference in perspectives between the government and investors is the main reason behind the recent volatility in Chinese markets. He highlights that de-risking and social stability have taken over economic efficiency since the pandemic. Hence, Tan says, “We should expect more volatility in the short term as Chinese policymakers implement structural reforms to expand the drivers of the economy and pursue the goal of “common prosperity” and a more equal society.”
Moreover, UBS AM informs that the technology cycle warns of challenges impacting China’s technological advancements, such as limited computational power and geopolitical risks. The asset manager says that the surge in generative AI stocks may lead to inflated valuations, requiring careful stock selection for investing opportunities.
Tan furthermore highlights that the healthcare sector in China gains significance amid rising raw material costs, with a focus on pharmaceutical companies exhibiting resilience, robust balance sheets, and potential in biotech. Selective investment in therapeutic drug development, addressing gaps in hypercholesterolemia and HBV treatments, is recommended, asserts the Head of Research.
“We believe that strategic stock-picking is vital, offering investors a pathway through the complexities of China’s evolving economic landscape,” he concludes.
