Along with many market commentators, Pictet AM has been wary about the situation in China. Covid-driven lockdowns, tightening credit supply and Beijing’s regulatory reforms have all dampened growth and raised uncertainty for the business and investment communities alike.
However, the country is showing positive signs of dealing with the Delta outbreak – leading to scope for a brighter outlook. Notably, stimulus and vaccination programmes should prevent a sharp slowdown in growth.
“We retain our neutral stance on the main asset classes amid signs that a recent economic slowdown will only be temporary,” said Luca Paolini, chief strategist at Pictet AM.
Amid the firm’s views on specific asset classes, he said Chinese bonds offer attractive yields, low volatility and deepening liquidity.
Within equities, meanwhile, Paolini believes Chinese stocks are attractively valued in the long term and relative to other stocks.
One of the puzzles facing the Chinese government, however, is why households are spending so little – and how to get them to spend more. Taking this into account, Pictet AM has chosen to reduce exposure to some cyclical stocks.
At the same time, liquidity indicators show that Chinese credit growth peaked last autumn and then started to contract four months ago. This means that even though the People’s Bank of China (PBOC) recently cut its reserve requirement ratio, the lagged effects from prior tightening will linger for the rest of the year.
The cut failed to arrest a contraction in credit creation, which it expected to bottom in September. But retail spending is expected to resume in the coming months once the impact of the recent Covid wave wanes.
In addition, the performance of Chinese equities was hit by concerns over regulatory crackdowns in key sectors, including technology.
Bonds offer a bright spot in Paolini’s opinion. At a time when income-generating assets are in short supply, Chinese bonds continue to offer attractive opportunities, Pictet AM said.
A recent shift in the monetary policy stance of the PBOC also supports the country’s fixed income market.
Faced with a slowdown in the world’s second largest economy, the central bank stands ready to ease monetary policy further after a 100 basis point cut in bank reserve requirement ratios in July. This sits in contrast to the US, with the Federal Reserve planning to scale back its monetary stimulus.