Looking ahead, we see reasons for cautious optimism. While it is still early for the Chinese economy to show strong signs of recovery, we remain constructive on the outlook in 2023 for several reasons. First, stimulus measures have been working their way through the system since the start of the second half of 2022. Further, we believe macro policy is likely to stay largely accommodative, with more legroom to support growth due to relatively low levels of inflation pressures that remain well contained.
Secondly, recent measures to ease Covid restrictions have come at an accelerated pace that has taken everyone by surprise – albeit it is a positive development for markets. It reflects the government’s concerns over the state of the economy as a result of the zero-Covid strategy. While the pivot may not seem gradual, by international standards, there still remains restrictions such as the need for a PCR test before entering China and, more importantly, the mandate requiring everyone to still wear masks. Like other Asian countries, we think the reopening will be bumpy with infections peaking in different phases, starting with cities before moving to rural areas. The direction of travel is still one of reopening and economic recovery.
Moreover, the troubled property sector appears to be well-supported, including a raft of liquidity support measures announced in recent months. Both of these instances indicate that the central government is well aware of the economic headwinds facing China and is prepared to intervene and protect the growth trajectory.
Moreover, the troubled property sector appears to be well-supported, including a raft of liquidity support measures announced in recent months. Both of these instances indicate that the central government is well aware of the economic headwinds facing China and is prepared to intervene and protect the growth trajectory.
Further, Chinese companies have thus far demonstrated strong fundamentals, with earnings growth of around 20%, despite an extremely challenging environment in the Chinese equities markets for the better part of the year. Valuations also remain undemanding due to investor sentiment. We think a combination of favourable earnings and supportive policies in 2023 will likely help improve international investor sentiment towards China.
It is worth noting that the likely next Premier Li Qiang is also a business-friendly figure, which could create upside surprises after two years of underperformance by Chinese stocks, relative to other markets. The consumer sectors have faced the greatest headwinds from zero-Covid, and we see significant recovery potential there. Overall, the Chinese market does not need too many catalysts to recover.
On a broader note, we see a bright future for companies able to adapt to changing regulatory frameworks and align with government policy objectives in areas such as digital innovation, green technology, access to affordable healthcare and improved livelihoods. We believe that the private sector retains a critical role in ensuring that the Chinese economy continues to innovate and prosper, and that China reaches its goal of being a moderately prosperous nation by 2035.
To that end, we believe there is strong long-term potential in our five portfolio themes: aspiration, digitalisation, green, health and wealth. That said, the long-term growth trajectory also faces some headwinds, including supply chain diversification away from China and restricted access to advanced US technologies – this is where our bottom-up stock picking approach, grounded in fundamental research and on the ground expertise, provides an advantage in finding the right quality companies to invest.
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