China experienced a volatile year in 2021 when the government adopted stringent policies in various sectors such as the internet and property, but Blackrock believes this constitutes an attractive entry point to the Chinese market.
“After the big underperformance this year, the market valuation has become more attractive and the risk-reward for investors has turned more favourable,” Lucy Liu, portfolio manager of global emerging markets equities told a media briefing this week.
“Indeed, the regulations resulted in some volatility in the near term, but they are all very necessary to transit the country’s economic structure to the next stage.”
Liu is more constructive on the China market next year and expects pro-growth and pro-market policies to kick in from the People’s Bank of China.
She recommends focusing on four themes: sustainability, self-reliance, social equality, and data security.
Across sectors, Blackrock believes those industries hit by regulations this year, such as the internet, property, coal and power sectors, are starting to bottom out, and foresees a more stable policy environment next year.
She believes the Chinese market will remain a “structural” market, especially in technology, carbon neutrality, technology innovation, which will present attractive opportunities for investors at both the sector and company level.
In terms of inflation worries, Liu expects the gap between factory and consumer prices will narrow. She also thinks a moderation in upstream prices will help the margins of midstream and downstream sectors.
Fears over the liquidity crunch in the China property sector have caused Chinese credit, especially in the high yield space, to sell-off in 2021.
Nonetheless, Blackrock continues to favour China high yield bonds in the coming year as it believes the country has passed its peak tightening point.
“Even though we do not expect a U-turn in policy, we do expect the tightening to stop or a slight easing to be provided,” said Neeraj Seth, head of Asian credit in Blackrock.
“There will still be potential defaults next year in the Chinese property market, but the overall pricing of credit in the sector is quite attractive even taking into account default risks.”
In the investment grade space, Seth prefers US dollar denominated bonds by Indonesia and India issuers.
Overall, he is positive on Asia’s credit market outlook for next year, not least because of the yield premium over US and European credits.