In the first of a two-part series, our investment team shares their 2H 2022 outlook on China equities and the three long-term structural themes.

Policymakers can take various actions to help meet their growth target 

There are reasons to be cautiously optimistic on China’s economic and market outlook in 2H 2022. The outbreak of the Omicron variant hit the economy hard in 2Q 2022, especially in consumption and the job market. This is prompting the government to step up fiscal support to revive economic growth.

Source: J.P. Morgan Asset Management. For illustration purposes only. As of 30.06.2022.
 

Central bank policy is likely to be more supportive of growth, in contrast with other major central banks’ tightening bias. For this recovery to be sustainable, consumer and business confidence need to stay buoyant.

China’s economic rebound and additional stimulus could support earnings recovery. Its regulatory environment shifting from ‘framework setting’ to ‘enforcement’ could also help reduce uncertainty. These could facilitate a valuation re-rating in both onshore and offshore China equities.

Three long-term structural themes¹

We believe the key secular growth opportunities remain unchanged in China’s technology, consumption and carbon neutrality sectors.
 

Technology has gone beyond smart phones and e-commerce in China. Artificial intelligence and cloud computing are becoming a part of everyday life. Against the backdrop of geopolitical uncertainty and the outbreak of the Omicron variant, China’s technology industry is embracing an inward economic pivot and is looking to make breakthroughs in core technologies to reduce its reliance on imported software and hardware.

Source: “China’s Share of Global Chip Sales Now Surpasses Taiwan’s, Closing in on Europe’s and Japan’s”, Semiconductor Industry Association, 10.01.2022. Forecasts and estimates are indicative of macro trends, may or may not come to pass.

Energy transition and carbon-neutrality are likely to remain one of the core investment themes. We expect rising new energy vehicle penetration, stricter emission standards and controls, and faster adoption of renewable energy to continue, and this could support revenue and earnings growth of related segments.

Source: China Association of Automobile Manufacturers, data as of February 2022. Forecasts and estimates are indicative of macro trends, may or may not come to pass.

Additionally, the electric vehicle supply chain and renewables such as solar power supply chains, installation, and storage could present opportunities too.

We continue to see brands benefiting from the longer term ‘premiumisation’ trend as the growing middle class demands better and healthier products. In some areas, industry consolidation opportunities can help compound growth.

Source: China Condiment Industrial Association, Euromonitor, as of January 2022. Forecasts and estimates are indicative of macro trends, may or may not come to pass.

Healthcare spending will also likely continue to increase, and we see opportunities in areas such as medical equipment and contract research organisations (CROs) and contract manufacturing organisations (CMOs).

Conclusion 

Overall, we are of the view that China’s policy seems to be shifting from de-risk to pro-growth. We are taking a longer term view, despite short term volatility, and are considering to selectively build positions from here.

Provided for information only based on market conditions as of date of publication, not to be construed as offer, research or investment recommendation or advice.
Forecasts, projections and other forward looking statements are based upon current beliefs and expectations, may or may not come to pass. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.

Diversification does not guarantee investment return and does not eliminate the risk of loss.

1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.


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