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Domestic recovery to drive China equities

Deutsche Bank International Private Bank (IPB) identifies three drivers that may lead to the outperformance of the asset class in the second half of this year.
Crowds walk below neon signs on Nanjing Road. The street is the main shopping district of the city and one of the world's busiest shopping districts.

Despite the challenges facing China’s economy, the peak of the pessimism should have passed with the reopening of Shanghai this month.

Growth in China has been impacted since last year. Firstly, there was a regulatory crackdown on some sectors such as property and technology. Then came the Covid resurgence earlier this year, which led to prolonged lockdowns in Shanghai and Shenzhen.

Yet the tide might be turning, according to Deutsche Bank IPB in its economic outlook media briefing, which FSA attended.

“Since Shanghai came out of lockdown, we have already seen a quick pick-up in activity indicators, such as retail sales,” said Stefanie Holtze-Jen, chief investment officer, Asia Pacific and head of discretionary portfolio management, Asia Pacific, at Deutsche Bank.

“While the zero-Covid policy will stay with us, these lockdown periods will get shorter and shorter, as mass testings are done extremely quickly. Now we don’t see prolonged periods of economic slowdown anymore.”

Holtze-Jen is “cautiously optimistic” that Chinese equities, boosted by domestic recovery, are likely to outperform global stocks in the second half of this year.

Bucking the trend

While the US and Eurozone could see a further slowdown in growth over the coming quarters, the private bank thinks China could see a growth resurgence backed by reopening and stimulus.

There could be increased capital inflows into Chinese equities, and Holtze-Jen believes the expected upcoming economic recovery will likely support positive sentiment.

A second factor in favour of Chinese equities is the easing of regulations in the technology and property sectors, which have been in place since late 2020.

For example, China has relaxed approvals for online gaming companies in recent months.

“It is a signal that the regulators may want to loosen the strict regulations on the tech industry,” said Holtze-Jen.

In the property sector, while it continues to deleverage under high-level guidance, Deutsche Bank IPB believes policymakers are more willing to ease restrictions mildly to facilitate the recovery of the economy.

The easing of rules and regulations would also prevent a repeat of defaults among developers. In turn, this could possibly drive Chinese equities.

The third growth driver for Chinese equities could be any reductions to the US tariffs on Chinese imports, said Deutsche Bank IPB.

“While the geopolitical tensions between China and the US may not ease any time soon, the Biden administration may consider cutting the tariffs on Chinese imports due to domestic inflation concerns,” Holtze-Jen said.

She thinks any progress on tariff reductions could support market sentiment on Chinese equities.

Meanwhile, she warned investors that the major risks to the asset class during the second half of this year include the potential worsening of global market conditions caused by the rate hikes and Russia-Ukraine conflict, potential new escalation of US-China tensions in the run-up to the US mid-term elections, plus any uncertainty over higher oil prices.

Part of the Mark Allen Group.