Trading the dragon: Chinese stocks are ‘second-half story’ for Deutsche while Lombard Odier sees safer bets in proxies
- ‘China is very much a second-half of the year story for us,’ says Stefanie Holtze-Jen, Asia-Pacific CIO at Deutsche Bank Private Bank
- ‘Our clients would be looking at [China’s] underperformance relative to global markets as being a little concerning,’ Lombard Odier says
Investors are willing to wait for policy clarity and stability in economic indicators before returning to the market, or rely on alternative offshore assets as proxies if they choose to stay invested in China’s economic recovery story.
“China is very much a second-half of the year story for us,” Stefanie Holtze-Jen, chief investment officer for Asia-Pacific at Deutsche Bank Private Bank, said in an interview. “What an investor needs to see is repeated macroeconomic data shifts, some consistency. Until then, there will be a bit of hesitation.”
The German private bank, which manages about US$593 billion of client assets globally, took a position on Chinese equities in February after seeing signs of stabilisation, but abandoned the trade last month because fragile market sentiment was not likely to sustain the momentum, it concluded.
The MSCI China Index, which tracks more than 700 stocks listed at home and offshore, has declined 35 per cent since 2021, compared with a 6.2 per cent gain for the S&P 500 and a 33 per cent rally in the Nikkei 225 Index. Despite state-led market intervention, the gauge has lost 1.8 per cent this year, while the S&P 500 and the Nikkei 225 advanced by 6 and 15 per cent, respectively.
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Policymakers in Beijing are stepping up their efforts to support the market, including issuing unprecedented guidelines for better market transparency and risk-management. That means there are still opportunities for tactical trades in Chinese stocks, Deutsche Bank’s Holtze-Jen said, in state-favoured sectors such as renewable energy.
Consumer sentiment, retail sales and home sales are all really “quite depressed”, and consumers are nowhere to be seen in the current stage of economic recovery, Woods said. “We have to wait and see if the government is able to provide sufficient stimulus, both monetary and fiscal” before animal spirits are reignited, he added.
“Our clients would be looking at its underperformance relative to global markets as being a little concerning,” Woods said. “It’s hard to see an immediate bounce back from a structural perspective” as the property challenges persist and consumption remains subdued, he said.
Bear-market rallies are as frequent as they are fleeting and they rarely provide a credible opportunity to build a long position, Lombard Odier said in a report earlier this month. Policy settings and policymakers have replaced earnings and valuations as market drivers, creating a greater element of unpredictably, it added.
As proxies, investors could buy the makers of European luxury goods as a bet on China consumption story. Base metals like copper and bulk commodities like the Australian dollar could be a way to participate in a classic stimulus-fuelled cyclical rebound, Lombard said in the report.
According to Deutsche Bank, structural issues in the property sector are weighing on China’s long-term growth trajectory. To boost consumption and contain further home price declines, China’s central bank could loosen monetary policy further, to the detriment of the nation’s currency.
“I’m worried about the sentiment, the macroeconomic data coming in patchy, and also that the [fund] flows will not follow,” Holtze-Jen said. “It’s prudent to step away and monitor for the time being until this is stabilising.”
