Jason Lui, BNP Paribas
BNP Paribas expects Chinese equities to broadly recover from their underperformance in 2021, helped by a “material shift in China’s policy stance”.
“That said, we still see divergence in index returns due to sector exposure and market-specific drivers such as China ADR (American depository receipt) dual-listing in Hong Kong,” Jason Lui, head of East Asia strategy at BNP Paribas, said in a report.
In 2021, there was a 60% spread between the best and worst performing Chinese equity indices within the onshore and offshore universe. While policymakers appear to have shifted to a monetary easing stance, BNP Paribas believes that macroeconomic challenges, including the housing market, zero-Covid policy, exports moderating and regulatory pressure on tech, could mean an uneven recovery in equities.
“While mega-cap stocks tend to outperform during broad-based policy easing on an overall sentiment boost, we expect support measures to be more targeted and structural in 2022,” Lui said.
The HSI was one of the world’s worst performing stock markets in 2021, falling 12.31% compared with a 22.35% rise by the MSCI World index, according to FE Fundinfo. The tech-heavy Hang Seng China Enterprises index did even more badly, posting a 21.67% decline.
However, there are four factors that could drive a HSI (comprising 65% mainland China and 35% Hong Kong stocks) recovery in 2022, said Lui.
First, inexpensive valuation (a 10.7 12-month forward price-earnings multiple) after a 20% de-rating; second, China ADR dual-listings and a new initial public offering pipeline driving incremental fund flows; third, the potential border reopening with mainland China and Macau boosting consumption spending; and finally, sector diversification as the HSI gradually becomes a 80-stock index (versus 64 currently).
The firm expects a 10-15% potential return on the index in 2022, following the sell-off during the first week of trading due to the weakness in technology stocks.
Mainland China indices
Meanwhile, the mid-cap heavy CSI 500 was one of the best performing Chinese equity indices in 2021. With a 40% index weighting in industrials and materials at the start of 2021 versus the large-cap benchmark CSI 300’s 17%, the CSI 500 outperformed the latter by 21%, according to Lui.
Some high-performing companies have since graduated from the CSI 500 to the CSI 300, reducing the sector differential from 23% to 16%. While industrials and materials could still benefit from supportive government measures, BNP Paribas thinks the return divergence between the two indices will be less extreme than in 2021.
“We expect ‘common prosperity’ to remain China’s key policy in the coming years. To achieve a more even distribution of incomes, the government has improved public services. It estimates its updated national insurance drug list for 2022 will cut public healthcare spending by renminbi 30bn ($4.7bn) and reduced the tax burden,” said Lui.
To monetise these policy objectives, he recommends that investors should focus on mass market consumption, as the potential rise in spending power is likely to boost this demand. For example, the consumer electronics, household appliances, beverages and dining sectors should benefit.
BNP Paribas’ view is shared by its French peer Amundi, which argues that Chinese assets should be at the core of portfolios, as the regulatory crackdown is peaking and credit growth is expected to bottom-out soon, while valuations are supportive.