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    CONTINUE Go Back
    1. Change in China

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    Investment Outlook 2022:
    Change in China

    Chinese equities have fallen sharply since February and we believe the recent decline represents a compelling investment opportunity for long-term investors. The decline has been caused by three main issues:

    1. Education – The Chinese authorities announced in July that companies providing private tuition for children need to convert to non-profit organisations. Some investors have since become concerned that a similar fate could befall other sectors. We believe fears that China may force other large industries to become non-profits are misplaced. Ultimately, the authorities in China know that in order to achieve their growth targets and to continue increasing the prosperity of Chinese citizens they need a flourishing private sector with companies that are allowed to make profits and are incentivised to invest in growth and innovation. In our view this announcement relates to their ambition to make sure that opportunities for prosperity and jobs are available to the broad population, not merely those that can afford private tuition.

    2. Regulation - Regarding the regulation of other sectors, particularly the tech sector, several headline-grabbing interventions have worried some investors. For example, the under 18s have been barred from playing online video games for more than three hours per week. Does this really justify the extent of the sell-off in some of the large Chinese gaming companies? The under 18s account for only about 6% of domestic gaming revenue at one of the largest online gaming providers in China, and yet the share price has fallen by more than 30% since its peak last February. We believe the long-term earnings growth outlook remains robust. Likewise, for other companies, we believe new regulations may somewhat slow the pace of profit growth but should not prevent earnings from still rising significantly in coming years.

    3. Property - Most recently, there have been concerns about Chinese property developers, with some suggesting that excessive leverage and speculation in the sector could trigger a “Lehman Brothers moment”. When we analysed this possibility, we found that the exposure of the large Chinese banks to the most at risk property developers would not be large enough to cause a 2008-style banking crisis. It is important to remember that financial stability remains a key Chinese policy goal. We believe that the authorities do wish to cool the property market, but that they have both the ability and the incentive to prevent potential spillover effects into the property market from becoming systemic. It wouldn’t make sense for the authorities to trigger a property price crash in pursuit of financial stability.

    Ultimately all these interventions relate to Beijing’s goal of “common prosperity”. We think the aim is to ensure that Chinese growth over the coming years is more inclusive and sustainable, which we would not expect to be bad for the economy, corporate profits or the stock market in the long run.

    In fact, more inclusive growth, leading to a continued expansion in the size of the consumer class in China, is one of the things that excites us the most. The Chinese middle and upper income groups are forecast to expand by over a third of a billion people by 2030. That’s about as many people as currently live in the US.

    Exhibit 11: China’s growing middle class creates compelling growth opportunities

    Estimated change in the ‘consumer class’ by 2030

    Source: Brookings Institute, J.P. Morgan Asset Management. Change in ‘consumer class’ is the change in the number of people from 2020 to 2030 living in a household and spending at least USD 11 per day per person. Other Asia includes Bangladesh, Indonesia, Pakistan, Philippines and Vietnam. Eurozone big 4 includes France, Germany, Italy and Spain. Guide to the Markets - UK & Europe. Data as of 19 November 2021.

    We are not therefore overly concerned about the recent slowdown in Chinese growth. In part the slowdown reflects China’s “zero tolerance to Covid” policy, in which stringent lockdowns are imposed at the first sign of infections. This policy is likely to remain in place, and potentially crimp demand, until after China hosts the Winter Olympics in February. But, as we have seen in the West, demand is likely to be merely delayed, not lost. We also expect Beijing to stop what was a deliberate tightening in credit and fiscal policy. Fiscal policy could become moderately more supportive, which alongside the catch up in demand, should enable China to grow by around 5% in 2022.

    We expect growth to be slower than in the past but also more sustainable. China’s ambition is to double GDP between 2020 and 2035. That goal is achievable. The increase in Chinese GDP by the end of 2035 would then be broadly equivalent to the 2020 GDP of the UK, Germany, France, Italy, Spain and India combined. GDP per capita should increase from USD 10,000 per person to around USD 20,000 per person. And remember, there are 1.4 billion people in China. That’s a lot of extra spending for companies and investors to benefit from.

    We therefore see the recent set back in Chinese stocks as an opportunity for medium-term investors. MSCI China trades on a forward P/E ratio of about 13x compared with over 20x for US equities. So Chinese equities aren’t expensive. Even if the P/E ratio just stays where it is, the projected expansion in the economy should drive company earnings significantly higher over the coming years, helping to lift Chinese stocks.

    Exhibit 12: Earnings growth and low valuations support the outlook for Chinese stocks

    Consensus estimates for global earnings per share growth

    Source: FTSE, IBES, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. MSCI indices are used for Europe ex-UK, EM and China. UK is FTSE All-Share, US is S&P 500 and Japan is TOPIX. Guide to the Markets - UK & Europe. Data as of 19 November 2021.

    More key themes for 2022

    • Earnings won’t be eaten by costs
    • Tapering without tantrums
    • The pains and gains of the energy transition
    • Finding value in value
    • Central projections and risks

    The Market Insights programme provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the programme explores the implications of current economic data and changing market conditions.

     

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programmes are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programmes, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research. This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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