Podcast - Japan: Land of the Rising Stock Market

While the narrative currently is about the path of US interest rates, how deep will the recession be and global banking issues, China stands out as being out of synch in its economic cycle with rest of the world.

This is important for portfolio construction. In short, economic policy is easing not tightening and domestic reopening only to be felt this year.

Revisit why invest in China now?

•       We have and continue to stay positive on Chinese equities in the medium to long term, particularly since valuation remains cheap and earnings bottoming and gradually revising upwards.

•       Mobility is rebounding look at subway ridership and Macau tourists flows. Since the Spring Festival Holiday economic momentum has been robust. Most industrial and logistics indicators rebounded strongly, while services are also picking up. We will likely see a strong recovery in consumption after the reopening.

•       Only major economy easing monetary policy to remain accommodative, which is favorable for risk assets, though it will be a gradual economic recovery.

•       Additionally, the Chinese domestic A-share market could be more immune to the banking turmoil in the short term. Once the dust settles, we expect outperformance of this broad-based Chinese market.

What China government policies will help drive growth?

•       The most recent National People’s Congress showed the government’s focus on achieving a target of 5% GDP growth for this year, albeit recent momentum in economic data is already starting to suggest that the economy could overshoot this figure, in-line with our forecasts. New jobs target has also been raised for the first time since 2017, addressing the urgent issue revolving youth/graduate unemployment. All in all, the outcome was very much in-line with our expectation of a gradual recovery in domestic demand and better environment for property as the year progresses.

•       China’s central bank PBoC cut the reserve requirement ratio (RRR) of banks this month, in an effort to keep money flowing through the financial system and prop up the economy. The surprise RRR cut indicates that China’s monetary policy still has an easing bias.

·         In fact, China lending data released last week beat expectations in March, as China aggregate financing reached 5.4trln yuan vs. 4.5 trln yuan expectations. Thus far year-to-date lending and credit data are stronger than expected. China monetary policy is easing as the central bank is unleashing long-term liquidity to boost bank lending. This is key to putting in a bottom in the property market. We saw last month China property sales also are bottoming as illustrated by the monthly sales.

·         China has largely defined domestic policy for the technology sector and property sectors. This should over time reduce the risk premium from the government actions over the past few years. We are already seeing a rebound in the technology sector as a result.

What are key risks?

•       Geopolitical tensions between US and China

·         Deep global recession

·         Renewed policy clampdowns in property technology or other large sectors