What would it take for Beijing to step up economic stimulus?

Overall, we would describe China’s growth outlook for 2024 as stable, but not spectacular.

China’s economic outlook in 2024 will largely depend on the scale of macroeconomic stimulus from the government and its ability to boost consumer and business confidence. Based on recent policy announcements, we expect Beijing to remain supportive of growth, but we think dramatic measures are unlikely. This implies interest rates are likely to stay low, and the additional CNY 1trillion bond issuance announced in late October should support growth in 1H 2024. Fiscal policy is likely to be directed toward infrastructure, as well as addressing the deterioration in credit quality in local government financing vehicles (LGFVs). The housing market recovery is expected to be gradual at best, since public expectation on property prices is still conservative. Overall, we would describe China’s growth outlook for 2024 as stable, but not spectacular. Consumption is likely to remain a bright spot, but investment, both in corporate spending and the real estate market, could take longer to recover.

Despite the subdued economic outlook, we do see some opportunities in the Chinese equity market. Corporate earnings, based on analysts’ earnings per share forecast for MSCI China, are expected to grow by 15.6% in 2024, after a projected 7.7% growth for 2023. Communication services and consumer discretionary, which include a number of leading tech names, are projected to deliver consistent earnings growth in 2023 and 2024, despite their price-to-earnings ratio currently trading below their 15-year averages. Hence, there are sectors with good earnings outlooks at reasonable valuations. Moreover, emerging sectors, such as renewable energy, electric vehicles and advanced manufacturing, are still enjoying ample policy support and the potential to be a new export engine for China.

In addition to the earnings outlook, selected Chinese stocks also present attractive dividend yields. At 2.7%, the CSI 300 dividend yield is higher than the 3-year government bond yield, reflecting the relative attractiveness of Chinese stocks over government bonds.

One hurdle to overcome for Chinese equities would be international investor sentiment. The geopolitical events around the world in the past two years and challenges in U.S.-China relations has impacted the willingness to invest in Chinese assets by U.S. and European investors. There has been renewed dialogue between Beijing and Washington in recent months, which is encouraging and helps to contain potential geopolitical tail risks. That said, this might not be sufficient to convince western investors to revisit investing in China in a material way.

Exhibit 5:

Source: FactSet, MSCI, J.P. Morgan Asset Management. Tech refers to Technology; Cons. Staples refers Consumer Staples; Comm. Services refers to Communication Services; Cons. Discr. refers to Consumer Discretionary. Consensus estimates used are calendar year estimates from FactSet. Past performance is not a reliable indicator of current and future results. *Data for the forward price-to-earnings ratio in the real estate and health care sectors begin from 30/09/16 and 30/06/09, respectively.
Guide to the Markets – Asia. Data reflect most recently available as of 30/09/23.

 

In our view, despite disappointing performance in recent years, Chinese equities remain an essential part of Asian investors’ portfolios. With an economy in transition, amid ongoing challenges in the housing market, sector and stock selection remains critical to separate the wheat from the chaff. Significant shifts are occurring within the manufacturing sector, while the services sector is increasingly playing a more important role in driving growth.