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Investors cautiously optimistic on China stocks

Economic recovery and stimulus measures offer a supportive backdrop for Chinese equities. But Barings warns investors that volatility could remain in the near term.
The famous Buddha Tooth Relic Temple in China town, Singapore. A stunning Chinese-style architecture among tall buildings with city lights.

Confidence has been growing about China’s economic prospects in line with expectations that outbreaks of Covid are now under control.

This is buoyed by government measures to rectify production and supply chain disruptions caused by recent lockdowns. At the same time, Barings believes supportive fiscal and monetary policies that include dovish central bank positions and accelerated investment in infrastructure are likely to bolster the macro backdrop.

“We expect domestic consumption activity to rebound and normalise from the lockdown restrictions with the reopening of the Chinese economy,” said William Fong, head of Hong Kong China equities at Barings.

However, Covid remains a potential risk going forward, he added.

Investors need to consider this along with other potential headwinds, such as the expectation that external demand from the US and Europe will weaken amid inflationary pressure and hawkish central bank policies.

“[These] could create headwinds for the export-driven manufacturing sector,” Fong added.

Further, the coming months might see some vulnerability in the Chinese equity market as company results for the second quarter are reported.

Staying positive

Yet Barings sees many reasons for the market to flourish.

For example, easing regulatory policies around internet companies and the property market could help China’s economy reach its ambitious growth target for 2022.

In addition, other factors that could provide a positive surprise include a reduction or removal of import tariffs by the US, a moderation in hawkish US monetary policy and a de-escalation of the war in Ukraine.

“We also expect to see further stimulus measures rolled out to provide support to the Chinese economy and markets,” said Fong.

The firm’s outlook has led to it capitalising on recent market volatility to build positions in high-quality companies that have returned to reasonable valuations.

“Looking toward the remainder of this year, we remain constructive on Chinese equities from a bottom-up fundamental standpoint, particularly due to the low base effect of the second half of 2021 on the back of easing policies,” Fong explained.

Focused on key sectors

In terms of structural trends, Barings is backing sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and ecological awareness as the economy gradually normalises.

“We believe these factors should bolster the outlook on sectors and themes such as new infrastructure, domestic consumption, healthcare, technology localisation and sustainability in the medium to longer term,” added Fong.

Part of the Mark Allen Group.