Lombard Odier is continuing to bet on Chinese equities, despite the recent souring of global investment sentiment towards the country, saying that it still expects the country to outperform developed markets.
“We believe China will outperform in the second half after a period of underperformance, as companies deliver superior earnings growth for the full year relative to their developed market counterparts,” it wrote in its latest investment strategy report for private clients.
Its outlook contrasts with the growing trend among asset allocators to abandon their overweight positions towards China having been disappointed by the failure of the reopening rally to sustain itself for as long as had been hoped.
A relief rally, which began in November upon early indications that Beijing was beginning to unwind some of its draconian Covid-19 measures, began to fade in February, largely as a result of the souring in global macro backdrop.
Many asset allocators predicted at the time that the reopening rally was not done as Chinese equities still look extraordinarily cheap both on a relative and historical basis, while there was hope that an improving macro backdrop would trigger companies back to a positive earnings revisions cycle.
That has largely not materialised, which prompted Pictet Asset Management, for example, earlier this month to declare that it had “waited long enough” and downgrade its outlook on Chinese equities to neutral from overweight.
Overall, Lombard Odier is optimistic that despite some of the recent weak manufacturing and inflation data, the country should be on course to achieve its 5.5% growth target this year, especially if there is monetary easing as is expected.
Regarding equities overall as an asset class, Lombard Odier favours quality stocks such as consumer staples, while it also highlighted opportunities in materials, despite recent weakness, given long-term tailwinds such as sustainable packaging and hydrogen as a fuel source.
In fixed income, the Swiss independent bank’s views are very much aligned with most of its peers as it said it preferred high-quality government bonds, which are benefiting from higher yields and have also recently reasserted their safe haven status, as well as liquid investment grade.
Like most of its peers, Lombard Odier eschews high yield because the spreads that are currently on offer are not factoring in the potential recession risk. Several other asset allocators have also said the fact that primary issuance has ground to a halt means the refinancing risk in the sector remains high.
In addition, the bank also noted that there are opportunities in emerging markets, although this is more in the local debt markets as the carry trade looks appealing with the potential weakening of the US dollar ahead.
Finally, the high dispersion of returns seen in public markets means that allocation to macro and trend-following hedge funds makes sense, according to Lombard Odier.
Macro funds and CTA funds were very much in vogue last year as they benefited from directional rates trades and some other commodities bets. There are questions whether they will be able to repeat last year’s stellar performance again, although the continued volatility in public markets will count in their favour.
