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?
Wenchang Ma
A more accommodative policy environment supports a 2022 market recovery.
The fast view
- To understand what has taken place in China, it is important to realise that the country’s monetary and fiscal cycle is not in sync with other major economies.
- Deleveraging in the economy and ‘Common Prosperity’ will lead to lower growth, but this will hopefully be smoother and more widely dispersed.
- After 2021's pullback, valuations are modest, with strong fund inflows supporting the technical position.
- Focussing on domestic companies should provide an effective counter-balance to geopolitical tensions.
QHow would you describe the behaviour of Chinese equities in 2021 – eventful?
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!
QShould investors be more or less optimistic about 2022?
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.
QWhat are the risks you see with Chinese equities?
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.
QWhat is your investment strategy?
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.
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2022 Outlook
2022 Investment Views
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.