While China stock bulls had another miserable year, their fortunes may finally improve in 2023 if the nation’s abrupt reopening from Covid curbs eventually leads to a robust economic recovery.
The Hang Seng China Enterprises Index, which tracks Chinese firms listed in Hong Kong, just suffered a third straight year of declines, a record losing streak since its inception in 1994. The slump in 2022 was accompanied by spiking volatility that was the worst since the global financial crisis and ranked the highest among major benchmarks in the world. Combined losses from stocks traded on the mainland and in Hong Kong reached US$3.9 trillion.
But 2023 is shaping up to be a better year, market pundits say, now that authorities have put economic revival back as a top priority, ramped up efforts to salvage an ailing property sector and signalled more support for private enterprise. It won’t be a smooth ride though, given the challenges from a messy Covid-Zero exit to lingering US-China tensions and a looming global recession.
“(The) market needs to be patient,” said Vivian Lin Thurston, portfolio manager at William Blair Investment Management. Sentiment towards Chinese stocks has room to improve further, but the process could be gradual and “with possible setbacks and volatility”, she added.
Chinese shares staged an epic rebound in November, when Beijing started relaxing Covid restrictions and increased efforts to defuse debt risks among property developers. Signs of reduced hostility between Beijing and Washington also brightened investor mood.
Renewed economic optimism and attractive valuations have prompted a growing number of Wall Street banks to become more bullish on Chinese stocks. Credit Suisse was among the latest to join the chorus, saying that the “time has come” to turn constructive on Chinese shares and upgrading them to outperform from neutral.
Although the rebound has lost some steam in December on concerns that rising infections will disrupt economic activity, asset managers such as Amundi believe any dips are a chance to buy.
“For Covid, as brutal as the pivot looks, it is a short-term pain in one to two months and long-term gain for consumption and industrial activity” in six to nine months, Bloomberg quoted Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management in Paris saying.
China’s economy is expected to grow 4.8 per cent in 2023, at a time when its global peers are grappling with the dual threat of elevated inflation and slowing growth. Beijing’s loose monetary policy, which contrasts with a hawkish Federal Reserve, as well as a softening stance on private businesses, may offer Chinese shares an extra tailwind.
Chinese firms’ cheap valuations also stand out. At about 10.6 times its 12-month forward earnings estimates, the MSCI China Index is less expensive than both its emerging-market counterpart and its own five-year average.
Still, tensions with the US will remain a key source of market volatility. While the bilateral ties have shown signs of improvement in recent months, including the reduced risk of Chinese firms being booted off American exchanges, thorny long-term issues still remain from semiconductors to human rights and Taiwan.
A weak housing market is another cause for concern. Although a slew of rescue measures have stabilised investor mood, analysts have warned that a full recovery will take months, if not years. That’s because in addition to depressed home demand, many developers remain shackled by a heavy debt pile. “The setup for China equity going into 2023 is looking good with odds still towards further upside, but I don’t expect a smooth ride,” said Ng Xin-Yao, investment manager of Asian equities at Abrdn.