We are cautious on the short-term path of the Chinese market and avoid making any directional calls until greater certainty arrives. We recommend a benchmark allocation to Chinese equities.
The rout in Chinese stocks accelerated after President Xi Jinping consolidated his power.
- MSCI China plunged 8.2% the day after the 20th Party Congress, its worst day since November 2008. YTD losses swelled to 43% by the end of last week.
- The political shift raised the risk investors may price prolonged pandemic controls, less support for the private sector, greater tensions with the US, and reorienting away from pro-growth policies.
But we still believe the risks and upside for China are balanced and investors should consider staying with benchmark allocations.
- We expect GDP to grow 5% and earnings to improve in 2023. Policy support should help property sales recover, and material COVID policy easing from 2Q23 should boost consumption.
- Valuations are undemanding. MSCI China’s price/earnings-to-growth valuation is at a 10-year low of 0.59x, 1.6 standard deviations below the historical average.
- Positive policy surprises remain possible at key political events in November and December.
So, we remain neutral and recommend holdings in line with China's 3% weighting in MSCI ACWI capitalization.
- Within that, we recommend defensive and value sectors with resilient earnings, such as consumer staples, banks, telecoms, and oil and gas operators.
- Investors with exposure above that level should consider diversifying more globally and consider quality income. Underexposed investors could consider buying on dips
- We also advise investors hedge CNY exposure against further weakness. China government bonds hedged into USD can act as a haven.
Did you know?
- President Xi Jinping was elected to an unprecedented third term at the Party Congress, and consolidated his authority by appointing allies to top positions.
- National security was a central concern at the 20th Party Congress to the extent that it was discussed in a separate chapter of the five-yearly Party Work Report. Xi called for a strengthening of national security on all fronts, especially in food, energy, and supply chains.
We are cautious on the short-term path of the Chinese market and avoid making any directional calls until greater certainty arrives. We recommend a benchmark allocation to Chinese equities, focusing on defensive and value sectors with resilient earnings, including select names in consumer staples, banks, telecoms, and oil & gas operators.
Main contributors - Patricia Lui, Crystal Zhao, Summer Xia, Yifan Hu
Content is a product of the Chief Investment Office (CIO).
Original report - What should I do with my China exposure? 3 November, 2022.