After a year in which China’s equity markets were held back by concerns over rate rises and increased regulation, the government has shifted decisively towards pro-growth policies. This creates a brighter outlook for equities in 2022.
- China’s government has moved to a more pro-growth stance, potentially creating more favourable conditions for equity markets in 2022
- Investors may want to consider shifting their China equity allocations to capture the potential benefits of easier monetary spending and higher government spending
- Long-term trends, including high levels of business spending on new technologies, aspirations for a healthier lifestyle and ongoing financial market reforms can deliver opportunities.
This article is a summary of insights from our Q1 2022 webcast on China equities that took place in early February.
China has entered a period of easier financial conditions – including rate cuts and higher government spending – that may provide a more favourable backdrop for equity markets through 2022, the Year of the Tiger.
This is a welcome change from 2021, when growth slowed and China’s government tightened regulation in some sectors – notably e-commerce, financial technology and private tutoring. But today, China’s fiscal and monetary policy has shifted back towards supporting the economy, according to Anthony Wong, Senior Portfolio Manager at AllianzGI and lead manager for China A-share equity portfolios.
“We have already seen interest rate cuts and increased fiscal spending, and top officials in China have repeatedly emphasised the importance of stability this year,” Mr Wong told investors during AllianzGI’s China equities webcast on 9 February.
China’s objective historically has been to balance growth, stability and reform, explained Tessa Wong, Product Specialist for Chinese equities at AllianzGI. This played out in the government’s shifting approach during 2021. In the first half of last year, China’s country’s rapid recovery from the first wave of Covid-19 brought robust economic growth, which allowed the authorities to accelerate reforms and address structural problems such as weaknesses in the property market. But in the second half, this phase came to an end as the economy slowed sharply and the government’s attention turned to more pro-growth measures.
Yet despite a well-publicized market downturn in autumn of 2021, China equities didn’t all march in lockstep. Performance was markedly different between domestically-listed A-shares, which are traded in “onshore” exchanges in Shanghai and Shenzhen; and the stocks traded in “offshore” markets, primarily Hong Kong and the US. Despite weak market sentiment, the A-shares market ended 2021 up 4%1 and attracted net monthly inflows of foreign capital throughout the year, as global investors used a period of weakness to build their long-term allocations to China.
However, the government’s tightening of regulation on internet-related sectors last year had a major impact on offshore markets, where many internet companies are listed. Offshore equities fell more than 20% during 20212. This drop was caused by a rapid derating of valuations as the Chinese government’s regulatory changes caused sentiment to weaken, rather than a collapse in earnings expectations.
By the end of 2021, both the onshore MSCI China A index and the offshore MSCI China index were trading close to their long-run average valuations, in contrast to some developed markets where valuations remain stretched by historical standards. To many investors, China equities today seem more reasonably priced than their developed market counterparts.
Long-term trends are supportive, though risk factors remain
Even though the policy backdrop is becoming more supportive for equity markets, important risk factors remain. China is maintaining tough public health restrictions to prevent the spread of the Omicron variant. If the virus escapes these controls, efforts to contain it could seriously disrupt the economy. China’s huge property market has also been causing concern. Several highly indebted property developers ran into liquidity problems last year as limits on leverage were introduced and the market slowed. However, Mr Wong believes the government will find a way to engineer a “managed decline” in property prices rather than a crash.
“If there are signs that the Chinese economy is decelerating further, we believe more aggressive rate cuts and fiscal policy actions will be taken by the government to cushion that downside risk,” Mr Wong said.
To capture the benefits of easier monetary spending and higher government spending, investors may want to consider shifting their China equity allocations to the exchanges and sectors that may be poised to benefit.
- Within the A-shares market, there are opportunities from domestic wealth managers, potential beneficiaries from rising household wealth and appetite to invest in financial markets
- Opportunities also exist in the long-term trends of healthy living and new technologies. The latter covers augmented and virtual reality, and the semi-conductor supply chain
- But investors may want to be more cautious about areas linked to the property sector, such as materials companies. The oft-cited mantra that housing is ‘for living in, not speculation’ suggests there is unlikely to be a quick rebound
Mr Wong added that the much discussed “common prosperity” policy, a central objective of the Chinese government, was not intended to involve state-sponsored redistribution of wealth, as often assumed in the West. Instead, it aimed to address more systemic long-term issues for China – including high levels of leverage, wealth disparity and slowing growth. He believes that the common prosperity policy would not deflect China from its journey towards financial and economic liberalisation. Access to foreign capital and a vibrant private sector would remain central priorities for the Chinese government.
For investors, China’s shift towards easier financial conditions, coupled with undemanding valuations, creates a more supportive backdrop for the country’s equity markets in the Year of the Tiger.
1 Bloomberg data as at 31, December, 2021
2 Bloomberg data as at 31, December, 2021
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; and in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
To help guide investors through the Ukraine-Russia conflict, we analysed more than a dozen similar events since 1953. Our conclusion? Underlying economic factors tend to be bigger drivers of the markets than geopolitical events – so keep a close eye on the oil price, inflation and central bank actions.