First in and first out - China as the vanguard for COVID-19 recovery
China’s path to normalisation offers guidance for other countries’ exit from the lockdown. Where are the opportunities for investors?
Nov 24, 2021
To understand what has been taking place in China, it is important to realise that the country’s monetary and fiscal cycle is not in sync with other major economies. China has been deleveraging and this is leading to a reckoning for some highly-geared property developers. In addition, a slower pace of investment growth and, more recently, some regional power shortages have contributed to a more severe economic slowdown than originally expected. So yes, it has been an eventful year, although on a relative basis I still think that due to the pandemic, 2020 was more memorable!
I am reasonably optimistic. Chinese policymakers are preparing the ground for a more accommodative environment which could support a market recovery in 2022. We just need to realise that the ‘Common Prosperity’ directive is likely to result in lower domestic growth, but this will hopefully be smoother and more widely dispersed.
Following the 2021 pullback, Chinese companies trade on modest valuation multiples for the growth on offer. The technical position is also positive with strong fund inflows from local and foreign investors, reflecting the early stage and ever-broadening opportunities.
Geopolitical tensions, especially with the US, will be an ever present backdrop but focussing on Chinese companies that are domestically orientated provides an effective counter-balance. We are also alert to companies on excessive valuation multiples, way ahead of their earnings potential.
We are overweight the energy, material and information technology sectors. In contrast, we are underweight real estate and the consumer sectors where the operating momentum is particularly weak. This positioning is consistent with the steer from our quant screen.
With Western central-bank policy normalising, economic growth rates diverging and global trade still readjusting to life after lockdown, investors have a complex environment to navigate in 2022.
Ninety One’s portfolio managers assess the outlook across their asset classes and regions.
Our team also takes a deep dive into the outlook for emerging markets, as well as into how sustainability will drive investment outcomes next year and beyond.