How 2022 is shaping up to be a year of redemption for Chinese equities
- Chinese stocks are holding their own even as aggressive liquidity tightening and recession worries trigger sell-offs in the US and Europe
- With much of the bad news priced in and efforts to stabilise China’s economy bearing fruit, investors who reduced their China exposure would be wise to revisit their position
Fears of receding central bank liquidity and risks of a recession have curbed investors’ enthusiasm for holding risky assets, resulting in large drawdowns in global equity markets this year.
The Fed’s operation, which includes shrinking its balance sheet, is expected to significantly reduce liquidity in the real economy and financial markets in the coming years.
To make matters worse, the Fed is slamming on the brakes when the US economy is already showing signs of fatigue. Falling house sales, stalling retail spending and slowing job creation are just some recent signs of the economy struggling amid tighter financial conditions.
With the risks growing that the economy is reaching a tipping point, it is understandable why investors are hunkering down.
Similar behaviour can be seen in Europe, where the European Central Bank is increasingly expected to raise interest rates despite the risk of a recession. The Euro Stoxx 50 has fallen by about 20 per cent since its January high, entering a bear market. Meanwhile, the S&P 500 and Nasdaq have shed some 18 per cent and 27 per cent from their respective 2022 peaks.
So what is behind China’s trend-bucking move? For a start, market valuations are attractive. Forward earnings multiples of the MSCI China index collapsed from over 19 times in early 2021 to less than 9 times in March, but have risen gently, to 12.4 times now – still below its long-term average. This suggests that a lot of bad news has already been priced in.
This followed reassuring words from senior policymakers to address market concerns, including working with the US Securities and Exchange Commission to ensure the continued listing of American Depositary Receipts (ADRs) of Chinese companies, and pledging that local regulations would be implemented in a transparent, predictable and market-friendly fashion.
Traditionally, the real estate market had been the biggest beneficiary of monetary easing. But this time appears to be different, given Beijing’s desire not to use property as a tool to stimulate the economy. That makes the equity market a strong contender for the liquidity windfall, which could help cement the bull run.
For global investors, who have either neglected China or significantly cut back their exposure in recent years, now may be the time to rebuild their underweight positions. China’s economic and policy cycles, which differ from developed markets, offer investors a useful tactical hedge against inflation, recession and monetary policy tightening.
There are obvious risks in Chinese equities too, but investors seem to be getting a decent deal as valuations have fallen a long way over the past year. With sentiment improving and attention shifting to improved fundamentals, 2022 could be a year of redemption for China’s equity markets after the disastrous performance of 2021.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers