In a sharp and surprising reversal, China recently announced measures to roll back some of the country’s strictest zero-Covid rules. These include scrapping the need for negative tests to travel within the country, allowing inbound travellers to skip quarantine and downgrading Covid’s disease classification.

The measures reflect the government’s concerns over the state of the economy as a result of the zero-Covid strategy. However, despite the rapid pullback, several restrictions remain. Travellers must take a PCR test before entering China. More importantly, the mandatory mask mandate remains firmly in place. Like other Asian nations, we think the reopening will be bumpy with infections peaking in separate phases, starting with cities before moving to rural areas. The latest death toll confirms the coming months are likely to be difficult. Nonetheless, the consequent direction of travel is one of continued reopening and economic recovery.

In general, we remain constructive on the outlook for 2023. Away from recent Covid moves, stimulus measures have been working their way through the system since the start of the second half of 2022. Furthermore, we believe macroeconomic policy is likely to remain largely accommodative. China has more legroom to support growth than many Western nations due to relatively low and contained inflationary pressures. Meanwhile, authorities continue to support the troubled property sector, including a raft of liquidity measures announced in recent months. This indicates the central government is aware of the economic headwinds facing China and is prepared to intervene and protect the growth trajectory.

The consequent direction of travel is one of continued reopening and economic recovery.

What’s the outlook for investors?

Conditions have been extremely challenging for China’s equity markets over the last two years. Despite this, many companies have thus far demonstrated strong fundamentals. Average earnings growth is around 20%. Valuations also remain undemanding due to weak investor sentiment. We think a combination of favourable earnings and supportive policies should help improve international investor enthusiasm towards China in 2023.

It's also worth noting that the likely next Premier Li Qiang is widely seen as a business-friendly figure. His appointment could create upside surprises in the coming months. The consumer sector has faced the greatest headwinds from zero-Covid, and we see significant recovery potential here. Overall, we think it won’t take many catalysts to spur a Chinese equity market recovery.

On a broader note, we see a bright future for companies able to adapt to changing regulatory frameworks and align with government policy objectives. These include areas such as digital innovation, green technology, access to affordable healthcare and improved livelihoods. We believe the private sector remains critical in ensuring that the Chinese economy continues to innovate and prosper, and that China reaches its goal of becoming a ‘moderately prosperous’ nation by 2035.

To that end, we believe there’s strong long-term potential in our five favoured themes: aspiration, digitalisation, green, health and wealth. That said, the long-term growth trajectory faces some headwinds, including supply chain diversification away from China and restricted access to advanced US technologies. In our view, this is where our bottom-up stock-picking approach, grounded in fundamental research and on-the-ground expertise, can provide an advantage in finding the right quality companies in which to invest.