Keiko Kondo, Schroders
After a year of underperformance, Hong Kong and mainland Chinese equities stand a good chance of outperforming their peers, especially in emerging markets, said Schroders.
“China operates with a very different economic cycle and now we are beginning to see more gradual reopening and that is likely to translate to economic growth,” said Keiko Kondo, head of multi-asset investments for Asia at Schroders.
“The Chinese markets have been discounted compared with the global markets. Given how much they have been underperforming, they are still cheaper than the rest of the world despite the recent rally.”
Nonetheless, she warned that investors should be aware of the volatility in both Hong Kong and mainland China markets.
“It is not about political risks, but simply due to the cyclical nature of the markets,” she said.
She noted that most of the other emerging markets are linked to the global economic cycle due to high volumes of exports.
As the rest of the world is likely to be going into a recession next year, some of the export-oriented economies could suffer from the lower demand while China, which is gradually opening up, serves as an interesting opportunity for investors, Kondo added.
When comparing the Chinese market with the Hong Kong market, Kondo thinks Hong Kong will generate a better return but also will face higher volatility in 2023.
As China gradually reopens and economic activity rebounds, the onshore market’s recovery is going to be slower but relatively stable. Meanwhile, the offshore market in Hong Kong is more impacted by global market sentiment.
“The offshore market probably will have a higher magnitude return but the risk-adjusted return might be very similar.”
Schroders has also upgraded its views on global equities to neutral from underweight.
“We predict 2023 will be heading into recession. So we are now approaching the last correction phrase and we are expecting the market to be bottoming out when earnings expectations bottom next year,” said Kondo.
This leads to the belief that quality, defensive and value companies across markets are more attractive than growth-oriented companies; that is to invest in companies that have the ability to generate profits even in difficult environments.
“Valuations are now at more attractive levels where investors may look to quality companies across markets for opportunities when the time is ripe, subject to recessionary risks and currently over-optimistic expectations on corporate earnings.”
“Investors can prepare to enter the stock markets as signs of bottoming out emerge.”
