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.
China equities
Portfolio Manager Wenchang Ma contrasts the behaviour of Chinese equities in 2021 with the outlook for 2022.
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.
QCan you describe your current positioning?
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.
Specific risks
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
General risks
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests.
Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
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2022 Outlook
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.