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BNY Mellon remains cautious on Chinese equities

Given the strong US dollar and economic slowdown in developed markets, the outlook for emerging markets (EM) remains tricky, said BNY Mellon Investment Management (BNY Mellon IM).
Made in China. Cardboard boxes with text made in China and chinese flag on the roller conveyor. 3d illustration

Despite the easing of the stringent Covid lockdown from the first half of this year, BNY Mellon IM is holding back from going overweight on China equities.

“We are neutral towards Chinese equities. Given the reopening of Shanghai and easing of lockdowns, we still see a few Covid cases here and there,” said Aninda Mitra, head of Asia macro and investment strategy at the firm.

“Although the intensity of lockdowns and the mobility restrictions are not as binding as they were a few months ago, many people are still at a ‘wait and watch’ mode, which holds us back from being more bullish on the Chinese market,” he added.

A drag from the property sector, as well as weak business confidence and labour markets, are also contributing to the asset manager’s views.

Nonetheless, BNY Mellon IM believes Chinese equities have cheapened significantly and three sectors will perform better: infrastructure, technology and consumer staples.

The easing of lockdowns and local government-driven infrastructure stimulus is going to lift China out of its second-quarter slump in the remainder of the year, said the asset manager.

“We’ve already seen specific local government bond issuance pick up, and we would not be surprised if there’s more central government bond issuance to support the economy,” Mitra explained.

The technology sector, which has been under scrutiny for the past months, is another area that is going to rebound, with BNY Mellon IM observing that regulations have dialled down over the past few months.

Another sector expected to perform is consumer staples, which is likely to benefit from pent-up local demand amid the easing of lockdowns.

Further, with the reopening of ports and improvements in logistics, supply chains in China will continue to recover, in turn benefiting exports of consumer staple, added Mitra.

Although some market observers might worry that Chinese exports may be disrupted if demand for US durable goods starts to dry up, BNY Mellon IM is not overly concerned given there is yet to be a material reduction in US demand.

“I think the Fed is trying to engineer a soft landing in the economy, so we have yet to see a very steep drop off in the US demand. Until that comes into focus, I expect Chinese exports will continue to perform well,” Mitra explained.

Part of the Mark Allen Group.