Schroders Head of Multi-Asset Management Asia Jason Yu: China Gets Set for a Promising Year of the Rabbit
February 2023 – This is an expert commentary on China (Economy, Sustainable Investments & Critical Tech Industries) and Asian Bonds – China Gets Set for a Promising Year of the Rabbit by Jason Yu who is the Head of Multi-Asset Management Asia at Schroders.
Founded in 1804, Schroders is one of Europe’s largest independent investment management firms by assets under management. As at 30 June 2022, assets under management were £773.4 billion (€898.4 billion; US$939.2 billion). Schroders has continued to deliver strong financial results. It has a market capitalisation of circa £7.7 billion and employs over 5,800 people across 38 locations. Schroders offers innovative products and solutions across their five business areas of solutions; institutional; mutual funds; private assets & alternatives; and wealth management. Clients include insurance companies, pension schemes, sovereign wealth funds, endowments and foundations. They also manage assets for end clients as part of their relationships with distributors, financial advisers and online platforms.
China Gets Set for a Promising Year of the Rabbit
Jason Yu: As China leaves its zero-Covid policy behind and reopens to the world, its policy has shifted focus to driving economic growth. We believe the Chinese economy is poised for recovery and are positive about its outlook. The Year of the Rabbit may prove to be promising for Chinese and Hong Kong equity investors.
We expect to see a further boost in equity prices when China’s economic recovery is in full swing. For now, investors may want to re-examine their portfolios and consider adjusting their allocation to equities, so as to better capture the investment opportunities that China’s economic reopening may bring.
” Expect to see a further boost in equity prices when China’s economic recovery is in full swing “
1) Chinese Economy Forecast to Grow 5% in 2023
Jason Yu: We expect China’s overall economy to stage a marked recovery as early as the second quarter of 2023. Meanwhile, the pandemic could still pose challenges and affect the momentum of recovery in the first quarter. Whilst economic growth might be temporarily hit, we believe China’s long-term recovery remains intact. With all factors considered, our current forecast sits at 5% growth for the Chinese economy in 2023.
” We expect China’s overall economy to stage a marked recovery as early as the second quarter of 2023 “
Some sectors are expected to recover faster than others, especially those driven by domestic consumption or the notion of “internal circulation” introduced in China’s “dual circulation” economic strategy. We expect consumer spending to recover significantly in the second quarter. Though previously under pressure, the real estate market has been on track for a sustained recovery as China eases its policy restrictions for the sector, but we take the view that a full-fledged recovery is still some time away.
Owing to the potential risk of recession in Europe and in the US, external demand for Chinese goods may fall. In this regard, it would be wise for investors to keep track of China’s export performance in 2023.
The Hang Seng Index has experienced a strong recovery since China eased its Covid-19 restrictions, reflecting the strong correlation between the performance of the Hong Kong stock market and the Mainland Chinese economy. That being said, Hong Kong equities will likely benefit from China’s buoyant economic outlook. Overall, we maintain a positive view on Mainland Chinese and Hong Kong equities, but are seeing more investment opportunities within the A-shares market, given that Hong Kong stocks have already seen significant gains.
” more investment opportunities within the A-shares market, given that Hong Kong stocks have already seen significant gains “
2) Continued optimism for sustainable investing and critical tech industries
Jason Yu: In terms of investment themes, we remain positive about sustainable investing and low-carbon related sectors. These include, but are not limited to, companies within the new energy and electric vehicle value chains. As China seeks to be self-reliant in key technological fields, accommodative government policy and finances to support the semiconductor industry are expected to continue.
” positive about sustainable investing and low-carbon related sectors “
We have observed a shift in China’s regulatory stance towards the internet sector as authorities resume the granting of online game licenses to developers. This move might be a signal that regulations related to the technology industry are easing marginally. With that development in mind, we have revised our view on the Chinese internet and technology sector from neutral to positive.
As the Chinese economy gradually recovers, investors should still pay attention to the potential pressure of rising inflation, in which case market rates or policy rates will likely rise, thereby making bonds less attractive from an investment standpoint. Overall, we favour Chinese equities over bonds in that market, whilst maintaining relatively conservative about the latter.
3) Asian Bonds a Means to Reaping Stable Income
Jason Yu: Nonetheless, we believe Asian bonds can be a means of reaping stable income. In view of a slowing economy in the US, many analysts are expecting inflation and interest rates to peak soon. On the other hand, Asian economies are expected to gradually recover following China’s reopening. Considering the divergences in economic cycles between Asian economies and those in Europe and the US, we believe that the days of the strong dollar might be numbered. Our expectation is for Asian currencies (including RMB) to strengthen against the US dollar going forward, which will enhance liquidity in Asian economies and increase the appeal of bonds in the region, especially those of investment grade.
” Asian currencies to strengthen against the US dollar going forward, which will enhance liquidity in Asian economies and increase the appeal of bonds in the region “
Despite the improving outlook for China’s economic recovery, investors should keep an eye out for potential risks that are inherent in the investment markets. The progress toward herd immunity in Mainland China will be a factor to watch, as the results could determine the pace of the market’s recovery in 2023.
All in all, we believe it would be wise for investors to maintain a diversified portfolio, and implement a bottom-up approach that analyses the investment value of a company in terms of its operations, capital expenditure and cash flow, among other factors. Taking such an approach can be effective in mitigating potential risks with the goal of achieving better investment returns. Simultaneously deploying top-down tactical asset allocations should enable investors to better capitalise on the Asia growth story in the Year of the Rabbit.
This is an expert commentary on China by Jason Yu who is the Head of Multi-Asset Management Asia at Schroders.
Important Information
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited. Schroder Investment Management (Hong Kong) Limited Level 33, Two Pacific Place, 88 Queensway, Hong Kong www.schroders.com.hk
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As a global active asset manager, the way we direct capital not only shapes the financial returns we achieve for our clients but also the impact that the companies in which we invest on their behalf might have on society. The relationship between these two outcomes has rapidly evolved as we see a fundamental shift in how companies are viewed and valued. Understanding the impact that they can have on society and the planet is crucial in assessing their ability to deliver risk-adjusted profits.
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