As the global economy recovers from the Covid-19 outbreak, Deutsche Bank International Private Bank (IPB) favours Chinese equities for the rest of the year.
“China and Hong Kong equities will be backed by economic recovery momentum, the still-loose monetary environment and the continued improvement in corporate profitability,” said Jason Liu, head chief investment office Apac, in the bank’s strategy report. In addition, Chinese equities have a lower price- to-earnings ratio of about 13 times, compared with US and European equities.
Deutsche Bank IPB expects the Chinese economy to be supported by increased export demand from the US and European Union, as well as improving domestic consumption. It forecasts GDP growth of 8.7% for 2021, and 5.5% for 2022.
However, both the equity and fixed interest markets face headwinds.
In particular, increasing government regulation on the tech-giants, with the introduction of tough new anti-monopoly and data security laws, means that investors must be prudent.
Another snake in the grass for the Chinese tech sector would be tightened regulations on overseas listing, which may lead to longer IPO cycles, or else tech companies might opt to list in Hong Kong rather than the US, according to Deutsche Bank IPB.
On the positive side, most Chinese tech companies have sufficient sources of funding, and anyway raising capital would not be a major hurdle, the bank pointed out. Hence, the sector remains attractive because of solid fundamentals and positive earnings outlook, and further weakness will be an entry point for long-term investors.
Looking at other emerging markets (EM), the Frankfurt-based wealth manager noted that the India equities have outperformed other regions over the last 12 months, especially metal and IT stocks. It expects that an increase in vaccination rates and earnings growth expectations will continue to support the market.
For fixed income, the wealth manager suggests a “selective and diversified approach”.
Market sentiment has been relatively weak in recent months towards Chinese corporate fixed income, due to credit events for some state-owned companies and property firms, and because the Peoples’ Bank of China (PBoC) implemented tight monetary policy earlier this year.
As a result, China high yield has underperformed. Despite the reserve requirement ratio cut recently, the PBoC may continue to show tightening bias especially in the property sector with their concerns over financial risks.
“That said, Chinese credit overall is still attractive, in our view, due to its relatively high yield (compared with DM credit), improving corporate profitability in a recovering economy, and still loose global monetary policy environment,” said Liu
“We would suggest a selective and diversified approach given the ongoing domestic targeted policy tightening efforts.”