China Equities: Year of the Rabbit!
- What do we think of China Reopening and Risks?
- We had moved to more optimistic on China equities just a few months ago. However, events have moved faster than even we could have anticipated. The market in general was uber bearish just a few months ago.
- China equities continued another strong upwards move in December as Covid-19 restrictions were significantly loosened in mainland China. There were two areas we were focused on the China property market and Covid- restrictions. Clearly the China pivot on Covid restrictions happened earlier than the market anticipated. In December, the government issued a 10-point directive which includes allowing Covid cases with mild or no symptoms to quarantine at home, less frequent mass testing and crucially a focus on boosting vaccinations of the elderly. So when do we think cases could peak? Normally it takes 7 to 13 weeks for cases to peak depending on the level of restrictions. This means as early as the Lunar New Year in late January or as late as early spring, albeit risks of new variants or extreme health system stress remains.
- In addition, on the property side, the government’s Central Economic Work Conference in mid-December illustrated that the government would prioritise the economy and boost domestic demand. While repeating that “housing is for living in, not for speculation”, policymakers would support fundamental and upgrading property demand. They are also focused on containing the risks around large property developers.
- We are positive on China equities. This was based on the potential progress on Covid policy loosening, more aid to help a bottom in the property market, and the cheap valuations. These further actions have given us the catalysts we had forecasted some months ago. Of course, there could be near-term volatility concerning the pace of reopening. We favour policy beneficiaries including consumption recovery stocks in the travel, leisure, and services sector, and selected companies in the technology sectors.