After years of underperformance due to the country’s zero-Covid policy, abrdn believes 2023 is the year for investors to reposition themselves when it comes to China equities.
“China is definitely investible, but you have to remain selective given that the economy is going through a bumpy recovery ride,” said Nicolas Yeo, head of China equities at abrdn.
“It is essential to choose sectors that are able to grow well and are supported by the government.”
As the world shifts its gaze back on the world’s second largest economy, abrdn shared five investment themes in China that it overweighs in 2023.
Firstly, aspiration spending. Despite the prolonged lockdown in China, the country’s rising affluence is leading to fast growth in consumption in areas including financial services and food and beverage.
“We are aware that there are upgrades in what Chinese young people want in life; they are looking for quality products and services,” said Yeo.
“The trend has not died down even with the pandemic and has become a long-term generational change among Chinese in their spending habits.”
Companies that fit into the aspiration theme include some high quality consumption firms.
With increasing Sino-US tensions and growing concerns over national security, the asset manager identified digitalisation as the second major theme in China for this year.
It favours home-grown software companies as the Beijing government will continue to encourage their companies to use Chinese-made software over their foreign peers.
“The domestic software companies have a natural advantage because they are supported and endorsed by the government in the name of national security.”
Investors should be selective when investing in semiconductor companies because of the US Chip Act.
abrdn believes they should avoid investing in chip manufacturing companies or those that are involved in cutting-edge technologies as they are easily caught up in the midst of the Sino-US tensions.
“We favour equipment suppliers because of a huge push by the country to be self-sufficient; that is Chinese companies to use chips produced by home-grown chip makers.”
Another theme that abrdn says investors should capitalise on in China is sustainability, especially in the electric vehicle sector.
But instead of investing in car manufacturers, Yeo believes there is more upside in car parts such as lithium batteries.
He also noted that despite the underperformance in 2022, some names within the green and solar energy sector in China grew earnings per share 40%.
The last two themes are healthcare and wealth management, which are likely to be benefit from the aging population in the world’s second largest economy.
Nonetheless, Yeo acknowledged that investors, particularly those in western countries, are often confused about the abruptly changing policies in China.
“The unpredictability of the policy framework hasn’t gone down very well with a number of international investors as they are still questioning whether the changes are benefiting the economy,” said Yeo.
“However, we believe time will tell. We think China could be led by domestic money and international investors will look at China again as the market goes up.”