After a challenging 12 months or so, China’s economy is positioned for a recovery that will likely have a positive knock-on effect for the country’s A share market.
In particular, Eastspring sees the tilt towards manufacturing-oriented companies as an opportunity for investors to take part in the multi-year transformation – and at undemanding valuations.
“We believe that the China A share market is poised to benefit from the recoveries in the Chinese economy, property market and earnings,” said Michelle Qi, head of equities for Eastspring China.
She pinpoints strong potential in companies within the electric vehicle and battery supply chains. In addition, those involved in the production of solar panels, consumer electronics, semiconductors and innovative drugs should also appeal to investors.
Unique market dynamics
The compelling case for China A shares in the second half of 2022 stems from key features that are specific to China, where domestic policies matter more, plus are often less affected by the global tightening cycle.
For example, inflation appears to be contained, so is likely to keep financing costs low – in contrast to the rate hikes in many other economies.
China also has a robust current account surplus that sets it apart from many other emerging markets amid rising inflation and commodity prices.
“We think that negative earnings revisions in China have troughed, with earnings growth forecasts having fallen by 28% from their most recent peak. As such, we believe that there is scope for China’s earnings to surprise from here,” Qi explained.
The firm also identifies several recent policy measures to help the economy recover, including tax rebates, deferral of corporate social security contributions and cuts in the purchase taxes on passenger cars and other goods.
Further, Eastspring expects policies to support infrastructure funding, as well as more subsidies for larger ticket consumer products such as cars, home appliances and electronics.
Caution from Covid
Despite this optimism, the domestic property sector and China’s stance on Covid will influence the pace and extent of economic recovery.
“Our baseline assumption is that the housing market bottoms out in 3Q22 and will be on course for a more meaningful recovery in 4Q22 or 1Q23,” said Qi.
As far as Covid goes, the expectation is that China will adjust its response depending on the situation.
“While renewed restrictions cannot be ruled out if the number of Covid-19 infections rise, we believe that China should be able to avoid the level of disruptions seen in April/May due to more proactive monitoring of potential outbreaks,” added Qi.