A peak in lockdowns, actions that show the policy put is still alive and the passage of time with silence on the regulatory front may be the needed catalysts for a re-acceleration in China’s economy and a more sustained rebound in its markets this year and beyond.
Global Market Strategist
Listen to On the Minds of Investors
The Year of the Tiger was expected to be a year of stabilization for China’s economy and of recovery for its equity market, following last year’s tough Year of the Ox. However, instead of positive surprises, investors have continued to grapple with uncertainties, both new and old. The arrival of the Omicron variant in China has caused its economy to slow further over the past two months and has pushed its equity market and currency lower. In addition, investors remain on edge about the introduction of further regulations, leaving them on the sidelines despite discounted valuations. When will China’s economy and markets find their footing? A peak in lockdowns, actions that show the policy put is still alive and the passage of time with silence on the regulatory front may be the needed catalysts for a re-acceleration in China’s economy and a more sustained rebound in its markets this year and beyond.
Following a tough year for China’s economy and markets, confidence is in need of a boost. Three catalysts may help:
- A peak in the percentage of the economy under lockdown would help investors feel confident the worst economic impact has been felt. A solution to the unsteady equilibrium of “zero COVID” and economic stability is redefining what success of the strategy looks like going forward. A lower metric for reopening focused on “zero COVID in society” (cases outside of quarantine zones and hospitals), combined with “closed loop” systems for factories and ports in areas facing restrictions, would help mobility and production to improve going forward.
- Actions that show the policy put is still alive would help investors feel confident that policymakers can put a floor on growth in 2Q. While a return to broad-based stimulus is unlikely, a pick-up in lending to small and medium sized enterprises (combined with the fiscal frontloading that has already occurred) would help the credit impulse to continue to move up and turn neutral to slightly stimulative soon.
- Passage of time with no new regulations would help convince investors that the introductory phase of the new Five Year Plan has passed and policymakers are indeed shifting to a “normalized supervision” phase, as has occurred in other reform cycles.
Chinese equities have started to rebound, up 19% in the four weeks after the March 15th low, in line with historical performance after similar +30% corrections. A further jolt in confidence would help convince local and foreign investors a sustained rebound is in the cards. Value certainly has been created, with MSCI China’s forward P/E now 8% below its 20-year average and the lowest since the 2018 correction. The return of foreign inflows into Chinese local assets would also help to stabilize the Yuan, which has depreciated 5.4% this year. For investors, a more important question is whether the right strategy for investing in the “new new China” is in place.
Initial rebound in Chinese equities, in line with average performance 4-weeks after a trough in +30% corrections
Source: Bloomberg, J.P. Morgan Asset Management.
Chinese market performance is based on the MSCI China price index only and do not include dividends.
The periods above were chosen to illustrate particular market moving events in China and the recovery 4, 12, and 26 weeks after market trough. The April 2011 to September 2011 period represents a period in which global fears were heightened due to China’s perceived growth slowdown. Fears culminated in a dramatic market sell-off in August 2011. The May 2015 to February 2016 period represents the currency crisis in China. The January 2018 to October 2018 represents the beginning of the default cycle. The February 2021 to March 2022 period represents the recent regulatory tightening campaign in China. *At the time of publication, March 15, 2022 was the most recent trough date.
Guide to China. Data are as of April 30, 2022.