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Stock prices are displayed on an electronic board in Shanghai. The performance of Chinese stocks has been affected by many factors, including Covid-19 lockdowns and a housing crisis. Photo: EPA-EFE

Singapore’s UOB sees Chinese stocks outperforming in the second half as Beijing moves to support economy

  • MSCI China Index fell 10 per cent in July, its worst monthly performance in a year
  • ‘Positive vibes’ from Beijing indicate more support on the infrastructure and lending fronts, says Abel Lim of UOB

Some fund managers are turning bullish on Chinese equities amid expectations that Beijing will implement more policy support and open liquidity to prop up the slowing economy, which will have a “multiplier effect on boosting consumption”.

China is one of the few bright spots in the world now, with low inflation making room for more liquidity and policy support a key reason for turning overweight on Chinese stocks from neutral, said Abel Lim, head of wealth management advisory and strategy at Singapore’s United Overseas Bank (UOB).

China’s consumer price index rose 2.7 per cent in July from a year earlier, against Beijing’s target of around 3 per cent for the full year. The central bank this week lowered its policy rates for the first time since January, while the Federal Reserve has raised by 225 basis points since March to control prices at a four-decade high.

“Because of the more positive vibes that the central government is putting up today, that suggests that the second half of 2022 is likely to feature more goodies from the government, particularly on the infrastructure support front and on the lending front by the banks,” Lim said in an interview on Monday.

Abel Lim, head of wealth management advisory and strategy at UOB. Photo: Handout
The MSCI China Index of 715 stocks slumped 10 per cent last month, its worst monthly performance in a year, as Covid-19 flare ups and a deepening housing crisis negated the post-Shanghai lockdown rally. A weakening economy that saw gross domestic product growth of 0.4 per cent in the second quarter, the weakest in two years, did not help matters.

Most Chinese stocks remain close to oversold, while many of the risks are known, said Lim, adding that the markets in the “second half will outperform the first half given the possibility of policy support”.

Chinese Premier Li Keqiang during a visit to the southern tech hub of Shenzhen on Tuesday urged leaders of key provinces to “shoulder greater responsibility” in stabilising the sluggish economy. A day earlier, the People’s Bank of China unexpectedly cut key interest rates, slashing both the one-year medium-term lending facility and seven-day reverse repos by 10 basis points.

The latest policy moves, which come in a politically important year, will support equities, particularly after the clampdowns that the authorities have effected over the last couple of years, Lim said.

For now, Beijing’s zero-Covid approach remains as a headwind for markets. But when the Chinese government eventually eases this policy, consumption could see a “revival [as] people open their wallets and there is a positive upward spiral in terms of the multiplier effect”, he added.

Some market participants contend that China’s economic recovery for the rest of the year will remain weak, given the slew of worrisome July economic data. Retail sales and industrial output slowed more than expected last month, while youth unemployment climbed to a record high.

“A combination of property markets woes, an impending export contraction and the dynamic zero-Covid policy will reduce the multiplier effect of current stimulus measures,” Montreal-based BCA Research strategists including Arthur Budaghyan wrote in a note published on Wednesday. “Hence, a meaningful recovery in economic activity will likely fail to materialise in the coming months.”

“The recovery in China will be U- rather than V-shaped, with risks tilted to the downside. Consistently, the risk-reward for Chinese stocks remains poor,” they said.

China offers troubled property market a lift through bond guarantees

Carlos Casanova, senior economist for Asia at Union Bancaire Privee, shares the same sentiment. He expects the economic recovery to be more gradual for the remainder of the year as policymakers implement measures to stabilise growth.

“We expect that the authorities will maintain an accommodative monetary policy stance, increase fiscal spending … implement more targeted macroprudential measures to control risks in the housing sector and pivot towards more flexible ‘dynamic zero-Covid’ policy in the fourth quarter,” Casanova said.