2Q GTC Video – U.S.

A major positive change to this year’s global economic outlook was China’s pro-growth policy pendulum shift late last year. Back in December, economists expected China to grow only 4.8% this year. Fast forward to today – expectations now stand at 5.5%.

This year, China became unavoidable for investors due to the arrival of the COVID reopening boom, the unleashing of three years of pent-up demand of 15% of the world’s population, and China’s policy pendulum shift towards the pro-growth side (including easing pressures on the real estate sector and boosting private business confidence).

So far, China’s economic data has broadly surprised to the upside, especially household services consumption (food services sales surged 26% year-over-year in March) and the housing sector (contraction eased to 5.8% year-over-year in 1Q versus -10.0% in December). Chinese policymakers’ official 2023 GDP goal of “around 5%” is now seen as a floor rather than a ceiling.

This growth upgrade has lifted indirect beneficiaries of China’s recovery, such as European luxury companies (with some names up over 50% since 3Q and continuing to hit all-time highs this year). However, Chinese equities have not responded as strongly as the economic data alone would suggest.

After an initial rally of 60% from late October to late January, Chinese equities have corrected 15% and are now down marginally for the year.

When will Chinese markets react to China’s improved economic prospects? A lift in consumer and private business confidence, combined with upgraded corporate earnings expectations, would boost investors’ confidence that this nascent economic recovery has room to run.

While it may take some time, we do expect confidence to improve – or for policymakers to stimulate the economy further if it does not. There is effectively a “policy put” in China this year given very low inflation levels.

Given China’s over 30% weighting in the MSCI Emerging Markets index, this would boost EM more broadly – allowing it to go from laggard to leader this year. The key for investing in China is to do so thoughtfully and using active management to focus on the areas of opportunity, while avoiding pitfalls. Opportunities include themes like “waves of reopening” (services then discretionary goods) and “beyond reopening” themes (green economy and advanced manufacturing sectors).

China’s reopening year may also benefit other EMs, such as South East Asian countries that depend on revenues from Chinese tourists – as well as continue to benefit European companies which derive 15% of their revenue from China (especially European luxury companies that derive 40% of their revenue from Chinese consumers).

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