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FX | Economy/Politics | Asia Pac / EM

China: Further Gains Ahead

We believe Chinese equities will eventually recover most of the bear market losses because there are sustained drivers for revenue growth and earnings upgrades. December was the first time in 10 months when the MSCI index EPS (earnings per share) was revised up.

The strong rally had not yet caught up with upward earnings revisions, implying further upside, as more accurate estimates will be made as the recovery in industrial activity becomes clear.


CHINA EVENTS 2021-2023

Source: Bloomberg as of Jan. 10, 2023. Past performance is no guarantee of future returns. Real results may vary. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. See the appendix for more information on the key points here.


The strongest phase of the turnaround in expectations and sentiment is likely to be in the first half of 2023, when full mobility returns to over a billion people for the first time in three years. Another 20% rally would bring us to about half of the bear market. Returns after 1H23 could still be positive but less substantial.

We expect the MSCI China index EPS to recover by 15% and for the PE (price-to-earnings) ratio to return to 13x in 2023. These assumptions would bring EPS back to 2019 levels and for PE multiples to return to a level consistent with the economic recovery seen in 2017. In other words, these assumptions remain relatively conservative. If borne out, this would imply 20-30% returns in 2023. Even if this occurs, the MSCI China would have recovered about 60% of the 2021-22 bear market decline.

While the rest of the world is still likely to slow down, China’s economy is likely to rebound sharply and more than we previously expected.

Consumption is being fueled by a record 15 trillion yuan of savings added last year. Monetary and fiscal policies have both been ramping up, particularly for property developer financing. This is essential given that it contributes 20-30% of China’s GDP.

These factors are more than likely to offset expected weakness in exports, likely boosting growth in 2023 to around 5.5%, higher than our previous forecast of 4.5%. The slowdown in the rest of the world is also likely to sustain Chinese equity outperformance.

1) Who are the key beneficiaries (countries and sectors) of China’s reopening?

The immediate beneficiaries are Consumption recovery (tourism & related, Thailand, Vietnam, Singapore, etc.), and Financial and Real Estate stabilization (banks & property can see lower asset quality concerns, insurance & brokerage may see further earnings rebound). Internet platforms are also a high beta beneficiary of consumption and can also benefit from the anticipated IPO resumption. Longer-term, remain focused on core tech and domestic production.

2) What are the risks that could derail the China recovery story?

The greatest risk is missing out. Not whether the recovery will happen. This recovery is virtually inevitable as over a billion people regain the freedom to spend money both inside and outside China. The biggest risk is to those investors to come in too late. The prospects for Chinese equities will be harder to ascertain in a year. The pent-up consumption energy will dominate all other well-known risks in 2023.

3) What equity strategy should investors adopt?

In the early stages of this recovery, cyclicals & value (financials, energy) could outperform. But for the longer-term economic expansion, we remain focused on structural growth areas or unstoppable trends in digitization (telecom, chips, AI, space exploration), green (sustainable energy, EV supply chain), longevity (biotech, wealth & insurance), and G2 polarization (supply chain diversification).

4) Should investors focus on onshore or offshore equities?

A-shares and H-shares both have meaningful exposure to the areas mentioned above. The H-shares were sold off more heavily and had higher beta, but that’s just an early rebound phenomenon. A-shares are more aligned to the shape of China’s economy and have more listed companies in the high growth areas like core tech.

5) What should investors focus on within the fixed income space?

Chinese fixed income opportunities are mainly in the high yield space, where developers who have not defaulted could see their bond prices return to par at maturity. The investment grade space generally sees lower yield than their US counterparts and may be vulnerable to rising rate risks by the second half.

6) What is the view on the surge in COVID cases?

China may have already reached herd immunity across the country after the surge in infections over the past two months. Though mortalities have risen sharply, the hospital system looks likely to withstand the surge. Lockdowns are unlikely to return.

7) What are the signs of a robust recovery?

Mobility data has been improving sharply in January; Subways ridership and road traffic congestion have recovered to near-normal levels since late December across major cities. Travel bookings to Southeast Asian countries have increased by 1026% year-on-year.

8) Three themes to watch:

  • Consumption recovery: travel and tourism, airlines, retail, and food and beverage
  • Financial and real estate stabilization: real estate, insurance, securities and wealth
  • Core technology development as a national priority: e-commerce and internet platforms as well as unstoppable trends, such as core tech, green, telecom, AI, and biotech

9) US-China relations: what is the near-term view?

Recently, China has taken a few steps to tone down confrontation. Even though we do not expect major improvement in the relationship, serious escalations may be avoidable in a year without major elections on either side. We suspect that geopolitical risks will return in the future but are unlikely to become an immediate hurdle to economic recovery in 2023.