By Nicholas Yeo, Head of Equities – China, abrdn and Co-Manager, abrdn China Investment Company Limited
The promise of a post-Covid rebound in Chinese consumer spending in the face of a likely global recession will present “hopp-ortunities” for investors to capture growth in Year of the Rabbit.
The symbol for the Lunar New Year starting on January 22 is a rabbit in the Chinese zodiac. Rabbits are esteemed in Chinese culture for being alert, cautious and quick to adjust to different conditions.
Of course, investors will have to be all ears to pick the right stocks, with a bumpy road ahead in the first half as China strives to manage not only surging Covid infections but also deleveraging in its troubled property sector.
Drawing on experiences from other countries, China’s initial re-opening phase is likely to cause some disruption to the economy, although we expect that to dissipate in subsequent infection waves. We’re already seeing an uptick in subway ridership in tier 1 cities such as Beijing and Guangzhou.
But beyond the first 3-6 months we expect to see a rapid resurgence in household consumption given pent-up demand from China’s years-long zero-Covid strategy. Certainly the relaxation of Covid restrictions unlocked fresh spending in other economies.
What could make China’s rebound all the more startling is its likely contrast with recession in many developed and emerging economies. Our abrdn Research Institute has forecast that the global economy will enter a deep recession by the middle of this year.
It argues that authorities in developed markets kept monetary and fiscal policies accommodative for far too long, inspiring inflation that central banks have battled to bring under control. Although global inflation has now likely peaked, wage growth remains elevated especially in the US. That will necessitate the continuation of tight policy that will likely lead to recessions in many economies.
However, inflation is benign in China, meaning authorities can retain loose monetary and fiscal policies to drive economic growth. In fact, we expect further policy easing to be introduced in the annual sessions of China’s national legislature and top political advisory body in Beijing this March.
We suspect this will include measures to stabilise and support demand in the real estate sector.
It all underlines China’s highly de-synchronous cycle: just as sequential growth picks up in China, we expect growth in the rest of the world to come down, with a number of countries entering recession. So for investors, China promises to provide a rare source of potential growth in the global economy this year, presenting strong relative value opportunities for Chinese assets.
Importantly, valuations are appealing. China’s A-share market is trading at a 35-year discount to its 15-year average on a price-book basis. Not only that, but that market saw company earnings growth of 10-15% last year despite many headwinds, and we anticipate continued earnings growth ahead.
Further, China’s A-share market has only about 26% correlation with the MSCI World Index - highlighting its strong portfolio diversification potential, which investors might require in a time of global recession.
Of course, investors will need to be selective. We favour five investment segments that we’re confident the government will support in line with its priorities to become more reliant on its domestic economy and amid a desire for innovation to keep pace in its strategic rivalry with the US.
Aspiration: rising middle-class wealth will drive demand for premium goods and services.
Digital: aligned with improving productivity and lowering costs to drive innovation and growth.
Green: China dominates global manufacturing capacity for renewable energy and storage.
Healthcare: there’s a need to make healthcare accessible given China’s rapidly aging society.
Wealth management: aligned with aim of becoming a moderately prosperous society by 2035.
It is for these reasons that we believe investors should be ‘hop-timistic’ about China in Year of the Rabbit.
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- The Company invests into other funds which themselves invest in assets such as bonds, company shares, cash and currencies. The objectives and risk profiles of these underlying funds may not be fully in line with those of this Company.
Other important information: The Company is a Closed-ended investment scheme registered pursuant to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended and the Registered Collective Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission.
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.
 In the Chinese Zodiac, animals are used to represent years in a repeating 12-year cycle.
 Source: abrdn, 8 December 2022
 Source: abrdn, September 2022
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