Economic growth momentum will likely decelerate in the short-term, and investors will face continued uncertainty as tough regulatory actions afflict several business sectors, the French wealth manager told a media briefing this week.
“We suggest investors diversify and exercise patience with their China equities holdings as the economy undergoes ‘normalization’, and until we can see clearer signs of stabilisation from Beijing,” said Winnie Chiu, senior equity advisor, at Indosuez WM.
However, she believes that future returns will be driven by corporate earnings growth.
“Investors should cherry pick stocks that are more supported by earnings and have less regulatory risk exposure,” she said.
Indosuez WM’s preferred sectors include consumer durables, selected financials, and green energy names. Domestic consumption stocks should hold up as the income gap in the country narrows and spending power increases.
Insurance asset companies should also see higher demand, as people look to diversify their financial risk. The push for better environmental standards will boost the demand for lithium, solar panels and natural gas, said Chui.
Chiu pointed out that equity performance in Asia was relatively flat year-to-date, and Chinese shares have taken the hardest hit given China regulatory and macro uncertainties and delta variant fears. The CSI 300 Index is down 6.6% and Hang Seng Index has fallen by 6.2% so far this year.
Impact of regulatory crackdowns
However, the tough actions taken by Beijing are not unprecedented.
During the past decade, China has been through two periods of regulatory tightening: the anticorruption campaign between 2103 and 2015, and the corporate deleveraging policy in 2018.
During these periods, the Hang Seng China Enterprises Index (HSCEI) traded at price-earnings ratio of between eight and 10 times. The HSCEI now trades at a multiple of 10.6, so Chui expects some further weakness in performance.
In the near future, food delivery platforms and property development companies are likely to come under regulatory pressure, while coal producers could face a backlash as pollution concerns grow, according to Chui.
“Investors need to look for the signposts to navigate the final stage of the regulatory wave,” she said.
These include the publication of formal drafts of regulatory documents, major companies systematically improving the social benefits and wages of flexible workers, key Fintech companies complying with regulatory requirements, and Chinese companies resuming offshore IPOs.
