[Outlook-in-Five] China Awakens – Local Impact, Global Ripples

Excerpt: China’s re-opening after three years of strict Covid-19 lockdowns and isolation from the rest of the world will be one of the most important developments for investors in 2023. For a start, China will be the only major economy with faster year-on-year (YoY) growth this year. We upgraded our 2023 GDP forecast for China to 5.2%, a rebound from last year’s 3% growth. In contrast, global growth will be 2.4%, dragged by flat US growth and negative GDP growth in the UK and Eurozone. Inflation, the bug bear of most major economies, remains tame in China. Hence, China’s policy makers can focus on economic growth vs. last year’s focus on leadership transition and regulatory issues. In the upcoming “Two Sessions” in March, we expect pro-growth signals with supportive fiscal and industrial policies to boost growth. Over the Chinese New Year period, activity and mobility data in China rebounded strongly with domestic tourism recovering to over 70% of pre-pandemic levels. This pent-up consumer demand - plus high savings rates - present tailwinds for a consumer and services-led recovery in China, across retail/consumer discretionary plays, tourism enablers and platform economies. Wait, but isn’t this view already consensus and don’t stock markets already reflect this optimism? After the sharp rally of the past few months, we do expect intermittent bouts of consolidation and profit taking. Hence, for the cyclical reopening theme and 1st order beneficiaries, we would time entry for travel and hospitality plays with strong earnings recovery on market pull backs. Overall, we believe HK/China valuations are still undemanding and positive fundamentals are a constructive set-up in 2023 as global investors seek opportunities. In particular, we favour sectors such as consumer, technology, renewables, green infrastructure and electric vehicles from a longer-term perspective. For China Tech platforms, the unbridled growth in the internet sector will continue to be met with regulatory scrutiny. Hence, we focus only on those with strong business moats, execution track records and structural business growth drivers. The Chinese currency has clearly benefitted from the faster-than-expected reopening, but further CNY strength is likely to be moderate. The dynamics of stronger China growth resulting in higher imports, will narrow China’s trade surplus given the backdrop of soft global goods demand. Faster border reopening and the swift recovery of outbound travel is also to the detriment of the CNY. Beyond its shores, China’s reopening is causing strong positive ripple effects across Asia and the global economy. What’s interesting for investors are the second order impact of China’s economic reopening across currencies, commodities, equities and fixed income investments across the wider EM complex. In Asia-Pacific, Japan, South Korea, the ASEAN economies, Australia and New Zealand will all gain from stronger Chinese demand for their exports, as well as the resumption of China tourism. Major exporters to China, including Europe and Latin America will also be supported by stronger commodities demand. This will boost commodities producers from Brazil, Africa, the Middle East, Indonesia and Australia. As China awakens, the horizon is not all rosy. Geopolitical risks continue to loom above, while global recessionary growth may dampen China’s re-opening benefits. That said, the risk aversion around investing in China is beginning to ebb with the country’s renewed focus on economic growth. Investors should seek potential opportunities to gain exposure to these trends, that have local impact and global implications within the context of their diversified portfolios. Tune in to find out more...