Investors wanting to allocate to China should look more at domestically-oriented Chinese companies as the country continues to bounce back from the Covid-19 pandemic and battles growing geopolitical tensions with the US.
According to Wenchang Ma, co-portfolio manager, All China Equity at Ninety One, Chinese companies that primarily serve their home market could perform relatively well in 2022.
“First, the macro backdrop looks more favourable. After roaring back from the initial covid outbreak, the Chinese economy has been through a more difficult spell,” said Ma. “A policy of deleveraging led to a reckoning for some highly-geared property developers, while a slower pace of investment growth – combined with power shortages and occasional local covid lockdowns – induced a sharper slowdown than many had expected. Now, though, the shift by China’s policymakers towards providing more support to the economy, should offer a tailwind for Chinese stocks.”
Chinese policymakers were far more reactionary in 2021 than in previous years. President Xi Jinping’s longer term policy priorities, which began to be set out in 2020 in anticipation of the Chinese Communist Party’s 20th Congress session, saw a number of national pivots which created a degree of uncertainty for the asset class last year.
The Chinese Government has pivoted on five main issues: income and wealth distribution, the environment, national security and self-sufficiency, curbing financial risk and anti-monopoly and regulation.
“While the priorities are set, the pace is not. In late 2021 the authorities’ priority has shifted decisively towards growth stabilisation, so three of the five – common prosperity, curbing financial risks and anti-monopoly measures, are likely to be de- emphasised,” said Philip Saunders, co-head of multi-asset growth at Ninety One.
“By contrast efforts to boost national self-sufficiency will be sustained and environmental investment, is an obvious candidate to be accelerated to support growth,” he added.
Turbulence in the nation’s property sector combined with the spread of the Omicron Variant is set to undercut growth in a more material way than expected, according to Saunders, and policymakers have so far been hesitant about stimulus, though Chinese markets would certainly benefit from a more liquid environment.
Portfolio manager for the Asia Pacific franchise at Ninety One, Charlie Dutton, added that despite regulatory crackdown in the sector, Chinese tech stocks could also be a safe bet, as greater clarity on the material economic impact of new regulation is realised.
“Within China-tech specifically, we now have some clarity on the actual economic impact of the new regulation. In my view, it was the speed of implementation of regulation, coupled with uncertainty about where it would stop, that most unsettled investors,” he said. “Looking at the sector now, investors are in a better position than during the crackdown, since they know more about the environment these companies will be operating in, which affords greater certainty on the strengths and limitations of business models.”
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