As a result, the MSCI China index fell 2.2% last week, following 2.9% and 4.9% declines in prior weeks. While the index has got off to a positive start this week, the recent retreat has pared the year-to-date gain to 5%—down from as high as 15% earlier in the year.
But despite the recent consolidation, we believe that the outlook for the Chinese economy remains positive this year, and we maintain a most preferred stance on emerging market equities, including China, in our global strategies.
The latest setback in Chinese equities is a healthy consolidation after a three-month rally.
Chinese equities have rallied 46% in three months since the government began to dismantle its COVID curbs in November. Therefore, we view the 8.4% decline in the past three weeks as a healthy consolidation attributed to profit-taking after the Lunar New Year holidays as investors await fresh catalysts on the reopening.
Furthermore, we believe the benefits of China’s economic reopening have not been fully reflected in the current valuations of MSCI China. We expect the start of the earnings season this week to provide some fresh upside catalysts and expect company management to reaffirm their post-reopening earnings recovery. We note that negative earnings revisions have started to ease while net earnings revisions in the consumer sector have begun to turn positive.
Consumption to lead economic recovery, buoyed by reopening and policy focus.
We expect China’s GDP growth to rebound to around 5% this year from 3% in 2022, led by a rebound in consumption and investment due to the reopening and the government’s targeted policy focus. We forecast China’s retail sales to grow by 7% in 2023 after contracting 0.2% last year. Tentative signs of a recovery in consumption were already evident over the Lunar New Year holidays as catering and movie box office sales reached 114% and 112.4% of 2019 levels, respectively, while domestic tourism recorded the strongest visitor and revenue levels since the pandemic. President Xi Jinping also signaled last month that domestic consumption will be key to economic recovery this year. Shortly after his remarks, the Ministry of Commerce announced that it plans to roll out policies to boost consumption, with automobiles and home appliances among the key focus areas.
Infrastructure investments are also likely to provide tailwinds to the economy.
Based on the heavy investment plans announced so far, we believe that infrastructure spending will also be a key pillar for China’s economic recovery this year. As of 12 February, local governments have unveiled CNY 21.5tr in infrastructure projects, of which CNY 3.4tr are planned for 2023. The investments are largely targeted at traditional infrastructure such as transport, city renovation, and water conservancy as well as smart infrastructure including 5G, AI, and big data centers. Furthermore, 29 out of the total of 31 municipal governments have set growth targets of at least 5% this year, reflecting a strong desire by Beijing to boost growth.
So, we remain most preferred on emerging market equities, including China, in our global strategies. Within Chinese equities, we like the direct beneficiaries of reopening, including sectors such as pharmaceuticals, medical equipment, and transportation. Broader emerging market equities also look set to benefit from China’s reopening, in our view.
Main contributors - Mark Haefele, Patricia Lui, Yifan Hu, Eva Lee, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - China's outlook remains positive despite the recent equity setback, 21 February 2023.