China Investors Look for Turning Point After $370 Billion Rally

(Bloomberg) — With Chinese markets prone to sharp turns after long and powerful trends, the timing of buying is almost as important as choosing what to buy.

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Investors who jumped into Chinese stocks on November 11, when Beijing cut COVID-19 quarantine periods and dialed back testing, have added nearly $370 billion to the value of equities in the MSCI China index.

Others are still waiting for clearer signs after Wall Street got it wrong this time last year. Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. were among those who recommended piling the market at the time, with more than $4 trillion in value destroyed in the 10 months through October alone.

“Chinese policies are like a huge freight train coming on track,” said John Lin, portfolio manager for China equities at Alliance Bernstein in Singapore. “The first thing you do is get out of the way. Don’t stay on the track! So jump on the train as soon as you can.

ahead of the curve

Abrdn Plc is among those who already see opportunities in the country’s corporate bonds following Covid policy changes and a comprehensive package of measures to support the property sector.

According to Ray Sharma-Ong, portfolio manager of multi-asset and investment solutions at abrdn, investors can take immediate positions to take advantage of a potential downward trend in China’s government bond yield curve as the economy reopens from Covid.

“Go short on the front-end of the curve while going short on the back-end,” Sharma-Ong said. In his view, a better outlook for growth would be pushing up back-end rates while China’s supportive monetary policy would involve front-end rates.

He added that dollar-denominated Chinese corporate bonds are already providing opportunities for returns of around 8%. According to Sharma-Ong, who expects the Chinese currency to remain strong, investing in local currency corporate bonds gives investors a bonus of 2% positive carry after converting the yuan back to the dollar.

attractive equity

M&G Investments (Singapore) Pte. and Eastspring Investments Singapore Ltd. are in the market to buy Chinese stocks. EastSpring argues they can’t be much cheaper while M&G likes domestic consumer brand names, original equipment manufacturers for electric and conventional vehicles and factory automation.

“We’re very close to bottom valuations and very close to very low earnings estimates,” said Bill Maldonado, EastSpring’s chief investment officer. “You would be buying now and expecting things to rebound on a three to six month basis.”

Catherine Yeung, director of investments at Fidelity International, said there has already been so much negative news driving the price of Chinese shares that the worst is likely over for investors.

december insight

For those still on the fringes, a Politburo meeting in early December, immediately followed by the annual Central Economic Action Conference, could provide useful clues.

Jason Liu at Deutsche Bank AG’s international private bank plans to take a closer look at state media at the moment. News from the closed-door work conference, which will bring policymakers together this year to review the economy and set goals and actions for 2023, could be a catalyst for the reopening of trades.

“We may see some signals from the top leadership,” said Liu, who expects near-term volatility in Chinese assets and a “very gradual” transition to Covid zero over the next few quarters.

Liu recommends taking a broad position and taking a position in Chinese equities, including the tech sector, to avoid potential drags, to benefit from a gradual change in market sentiment.

He also sees the yuan as potentially appreciating during the first half of next year. Liu does not recommend credit at this point in time, warning that it may take longer for the property market to recover.

Any early indication on the economic growth target for next year – seen as around 4.8% according to economists polled by Bloomberg – will help guide market sentiment.

spring spindle

Morgan Stanley is among those who expect a boost in China’s economic opening in the spring, when weather turns more favorable, vaccinations may increase and the National People’s Congress in March emerges as a key event for market-moving events. emerges in

According to Andrew Sheets, chief cross-asset strategist at Morgan Stanley, investors who are underweight in Chinese assets could turn neutral around this time.

China’s domestically focused consumer companies stand to benefit, according to Morgan Stanley.

Sheets said, “If investors are presented with a stalled Fed and China’s reopening and strong growth in the second half of 2023, I think they will see it in many different emerging-market assets.” will be seen as a positive background for

Future

According to Simon Flint, macro strategist at Bloomberg News, the reopening of the economy from Covid could result in positive inflows equal to 1% of GDP into China’s equity markets in 2023. He said that this would lead to a rise in the yuan.

James Leung, head of multi-asset Asia Pacific at Barings, recommends aligning a China stock portfolio with the government’s policy priorities by investing in the electric vehicle sector, renewable energy and hardware technology supply-chain.

Like Barings, AllianceBernstein sees stocks in energy and technology security as low-hanging fruit for investors, as long as the companies are aligned with the government’s goals.

Alliance Bernstein’s Lin said the market has changed from the era before the pandemic and regulatory crackdown, when investors would hunt down the latest technology and biotech darlings and then multiply the money 10x, 100x. “Now you can still find growth, but it has to be a policy-sensitive kind of finding.”

–With assistance from Ruth Carson, Sofia Horta e Costa, Ishika Mookerjee and Abhishek Vishnoi.

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