20 Dec 2022
With signs of a relaxation of covid restrictions and a broader potential re-opening of the economy, is this the bottom for Chinese equity markets? Raheel Altaf, global emerging markets equity manager, thinks sentiment may surprise positively.
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The Chinese equity market saw its biggest one month rise in the last two decades during November, fuelled by initial signs of a relaxation of covid restrictions and a broader potential re-opening of the economy.
The MSCI China index rose 29% in dollar terms* during the month, the single biggest one month rise in the last 20 years, with consumer-focused businesses leading some of this recovery.
But despite these strong returns, the MSCI EM (Emerging Markets) index is back at September levels, giving some context as to how poor things have been in China.
So is this the bottom for the Chinese equity markets, after the travails of covid restrictions and government policy intervention in some sectors such as education and gaming?
My view is that it is always very difficult and invidious to call the top or bottom of a market, particularly one like China.
But recent positive developments in money supply and monetary policy suggest that sentiment could continue to surprise positively.
This easing contrasts with developed markets, where tightening measures are necessary to control inflation. With inflation at benign levels in China, we think the potential to support growth in the economy with policy measures remains significant.
Our emerging markets portfolio has continued its shift towards ‘beaten-down’ internet stocks in China over the last few months, adding Alibaba, JD.com and Baidu.
Deep-value stocks continue to offer protection against a volatile market environment, and they are a significant exposure in our portfolio.
Looking beyond the short-term challenges, we think China still offers exceptional opportunities for investors who focus on fundamentals and are willing to look to the longer term. We remain overweight China as a result.
The turn in sentiment has favoured mega-cap tech significantly. We have, until recently, been very light in this area. However, against the backdrop of improving sentiment, we would expect some of the companies we hold to perform well.
This belief is driven by the favourable fundamental characteristics we observe. Share prices have some way to catch up with this potential.
* Source: MSCI in dollars, 31 December 1992 to 30 November 2022
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