Onshore and offshore China equity markets have behaved quite differently since the conclusion of the Party Congress.
At one stage, the MSCI China Index had fallen by 10% before rallying sharply. In contrast, the MSCI China A Onshore Index fell by around 5% at the low point and is now close to flat (2 Nov 2022, local currency). 1
The trigger for the market rally was a rumour – starting on social media in China - that a “reopening committee” had been formed to assess various opening-up scenarios.
The market also received a boost after some local authorities approved a new inhalable vaccine, made by a Hong Kong-listed company called CanSino Biologics, which may be more appealing to sections of the vaccine-hesitant population.
Whether there is any truth to this rumour or not, only time will tell. But what the reaction does show is the extent to which zero-Covid policies have been weighing on markets.
Chart 1: MSCI China A Onshore Index – decomposition of index returns
Source: Bloomberg, as at November 2, 2022
On the one hand, the lockdowns clearly limit people’s ability to travel and to move around. There have been examples of this in recent days – visitors to Shanghai Disneyland at the weekend had a longer stay than they bargained for in Space Mountain when the park was locked down after one guest tested positive.
Over and above this, however, is the more psychological impact of the uncertainty. Consumption remains depressed. And savings rates, which were already high pre-Covid, have continued to grow further.
The flipside to this, of course, is that when Covid policies are eased, there should be significant pent-up demand.
It was only three years ago when it was commonplace to see queues of Chinese tourists at duty-free tax counters in airports around the world. Those days will come again as there remains huge appetite in China to travel and to experience the rest of the world.
So where do recent events leave us in terms of the market outlook?
Our view overall is that both onshore and offshore markets have discounted a lot of bad news. China A-shares are trading close to 11x forward PE and offshore China at less than 10x.2 In both absolute terms and relative to history, these are low levels.
In addition, looking further out, the price-earnings-growth (PEG) ratios are well below one.3 Many quality growth stocks have derated significantly.
Chart 2: MSCI China A Onshore Index – future Price Earnings Growth (PEG) ratio
Source: Bloomberg as at 30 September 2022
The key is the confidence level in the “E”. The current lack of confidence – and the associated market derating – has been the main factor behind the sustained weakness, especially for China A-shares.
Things can change quickly, however – as events this week have demonstrated. It is only a matter of time before China starts to plot a course out of Covid.
While we see upside potential in both onshore and offshore markets, our view currently is to favour China A-shares. Given the more limited options available to onshore investors, domestic equities are likely to respond quickly to signs of macro improvement.
The situation for offshore China markets – where global institutions dominate the shareholder base – is more challenging.
The outcome of the Party Congress appears to have been a big “reality check” for global investors.
Although in practice the Congress has formalised what was already happening more informally in terms of consolidation of power, nonetheless recent market events demonstrate that the perceived level of risk associated with investing in China has clearly increased.
And while geopolitical risks may ease a little once the US mid-term elections are behind us, nonetheless these factors are still likely to pressure valuations in the offshore market in a way that is less of a factor for A-shares.
Our view on long-term growth themes in China has not changed as a result of the Congress. We expect a continued push to enhanced domestic capabilities in areas such as technological development, the transition to green energy, and food security. And in order to support the funding of China’s growth aspirations, we also anticipate further reform and enhancements to the infrastructure of China’s capital markets.
1 Source: Bloomberg, 2 November 2022
2 Source: Bloomberg, 2 November 2022
3 Source: Bloomberg, 30 September 2022
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Foreign markets may be more volatile, less liquid, less transparent, and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. 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 4 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; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK)