28 Feb 2023
Global CIO Andrew McCaffery and our local experts deep dive into the major big picture issues currently impacting the investment landscape in China. They outline how this translates into our views across asset classes and discuss how China re-opening after COVID is likely to affect markets.
The ideas and conclusions here do not necessarily reflect the views of Fidelity’s portfolio managers and are for general interest only. The value of investments can go down as well as up, so your clients may not get back what they invest.
There was general consensus that China - normally characterised by “a strong belief in gradualism” - has been through an “extreme pivot”. In COVID terms, it is less than two months from stringent lock down and testing to early relaxation and COVID cases spiking through to things getting back to normal. There has been a similar “roller coaster” change in investor sentiment which has driven a broad “beta rally” correction, with the market approximately 50% up since last October and with a lot of faster-moving money now back in.
We may see some consolidation/taking stock by shorter-term investors, but see scope for sustained second phase upside, likely to come through as an “alpha rally”, with greater dispersion between winners and losers and a balance between value and growth.
Given the very substantial savings profile of the China consumer, which increased further during COVID, high savings are now beginning to be re-deployed, albeit with different speeds across categories. High-end is coming back faster, for example through “scenario consumption” e.g. wedding events.
China is on “a very different path” to Western markets at this point in the business cycle across a range of fronts. Inflation is more contained and the latest China CPI print at the end of last week showed it hovering just above 2%. Labour shortage is not an issue for China and there is a palpable sense of business activity coming back with private business clicking into profit-making mode. Hard evidence for the extent of this growth is yet to come through in the data, but 88% of Fidelity China analysts expect their sectors to be in early or mid- stage expansion in 12 months’ time.
The Peoples’ Congress (PC) meeting next month looks set to keep policy consistent - policymakers did an impressive job of maintaining liquidity through extreme pandemic volatility - and aim for a gradual rebuild of domestic consumption through their “China for China” policy. They will also be looking to support the recovery in a way which can be sustained over coming quarters and years, not just the next few months. The PC may also look at support for longer term structural transition, including pensions and retirement and building on stabilising measures already put in place for the real estate market.
March is also corporate earnings season. Business leaders will also be providing their assessment of the recovery outlook and markets will also be watching closely.
Could the China recovery be cast aside by geopolitical risk? We see the US-China dynamic in terms of ebb and flow. A key flashpoint, like Taiwan, does not feel like it is on the radar short term. More likely is an intermittent “two steps forward and one step back” pattern. Some geopolitical tension may feed through to some investor perceptions on risk premia, but we do not see this de-railing the China recovery, which is a key focus for Chinese policymakers. It is also worth noting that, in terms of geopolitical economics, China is not Russia. Western supply-side reliance on China means the kind of sanctions executed in relation to Russia look much more problematic to attempt in relation to China.
We see multi-faceted effects in the way China re-awakening is playing back into the global investment narrative. Global risk premia are broadly down because China’s re-opening keeps growth up for now. However, if we see China’s demand for oil and other commodities picking up, this may contribute to further inflationary pressures adding to the dynamics that Western central banks are still looking to manage. On the currency side, sustained China recovery is likely to support RMB as a diversifier versus USD - to take one example, Gulf States looking to re-deploy resurgent oil and gas revenues may increasingly see China as another place to put capital to work productively for the long term.
Equities are showing room for growth but there is increasing dispersion between winners and losers. From a fixed income perspective, the asset class shows improved overall sentiment and activity, albeit not the “screaming buy” territory we were in at the end of last year. Onshore offers RMB play and long-term China exposure.
Private assets are still lagging public markets after 30-35% haircut on marks at the end of last year. Several companies at late growth stage/pre-IPO are looking to come to market - a sign of health when they do. In practice, the shift from down rounds to up rounds could happen quickly and capital flow is ready and waiting to allocate to private as well as public.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can also be more volatile than other more developed markets.