(BFM Bourse) – The Chinese begin the Lunar New Year celebrations this Sunday in a context of the end of the zero-Covid policy. And with significant upside potential for local equities.
In Chinese astrology, the rabbit is synonymous with delicacy, calm and hope. As the world’s second-largest economy heads into the Lunar New Year, with celebrations kicking off this Sunday, February 22, this sign is timely.
Chinese stock exchanges, which will be closed for a week, until January 27 inclusive, have suffered in 2022, at least until November. The CSI 300, which brings together the 300 largest capitalizations of the Shanghai and Shenzhen places, fell by almost 20% last year, weighed down by the “stop and go” of the economy due to the zero-Covid policy of the Chinese government. The country’s growth stood at 3% last year, its lowest for more than 45 years, if we exclude 2020 (+2.2%), the year of the spread of Covid-19. 19.
“Chinese stocks have been hit with a triple whammy from their peak in 2021. The government unleashed regulatory one-upmanship on companies, rigid zero Covid policy crushed demand, and the housing sector slumped” , recalls Pictet Asset Management.
Business results that should improve
But in recent months, the gradual reopening of the economy has been set in motion, in particular following a popular protest movement not seen since 1989. On January 8, China officially lifted quarantines for people entering Chinese territory, de facto ending three years of zero-Covid-19 policy.
The depression gave way to a certain enthusiasm. Morningstar thus asks the question: will 2023 be the year of China? “Despite the difficult context, the recent stock market rebound around the relaxation of anti-Covid measures in November seems to indicate a return to favor for the asset class and the hope of a return to a more sustained pace of economic growth. and inflation under control,” said the financial intermediary.
“Valuations are back in neutral territory, with equities trading at a 30% discount to global equities – the discount was less than 10% at the start of 2021. But to extend those gains, Chinese companies will have to record profit growth, which is expected to happen in 2023,” Pictet Wealth Management said.
Chinese companies should precisely see their results improve significantly. Their earnings per share could take off by 15% this year, according to the bank UBS, which recommends to “overweight” Chinese stocks.
According to a survey Bloomberg, quoted by the specialized broker KraneShares, the managers anticipate a growth of Chinese stocks of 17% this year. Quoted by several media, Morgan Stanley is counting on an MSCI China, an index expressed in dollars, at 80 at the end of the year, ie a potential this time of more than 10%.
“The Chinese economy should take off in 2023, which bodes well for equity markets,” said asset manager DWS. Sean Taylor, chief investment officer of the firm’s Asia-Pacific region. The latter notes that the latest economic statistics “suggest that a V-shaped recovery is shaping up for China in the second quarter”.
After the “capitulation” the return to favor?
“Investors, who had ended up capitulating, that is to say by selling their Chinese stocks in 2022 and taking the valuation ratios to historically low levels, will once again be inclined to take an interest in them”, predicts Atlantic Financial Group .
According to the financial intermediary, capital flows to China will accelerate. “While global growth will experience a considerable weakening in 2023, the Chinese economy will record an upward trajectory. This exceptional decorrelation, linked to the end of the zero covid strategy and strong fiscal and monetary policy support, bodes very well for Chinese equities. […] Investors will not be able to do without this allocation to generate a little magic and prosperity in their portfolios during the year of the rabbit”, he develops.
If the Chinese markets have logically regained momentum at the start of the year, “there is still room for prices to continue to rise”, judges Sean Taylor.
However, it will be necessary to monitor the evolution of the pandemic in China, and how it will translate into the various economic indicators, knowing that, for the time being, the IMF expects a rebound in growth to 4.4% in 2023. Sean Taylor is counting him on 5%.
“Despite the lifting of restrictions, the Chinese are still very afraid of Covid and its consequences on health. The population remains afraid of too large gatherings which, for the New Year, could lead the Chinese to limit the number of people meeting, and therefore weigh on consumption”, underlines Jie Zhang, analyst at the independent research office AlphaValue.
“We hope to see a gradual improvement in the real estate segment, which would restore oxygen to the whole Chinese economy, and in particular a boost to consumer confidence, which is still at a plus. Although the Chinese government has launched favorable policies to stimulate the real estate sector since October 2022, the downward trend continues according to recent data.
“Although China’s economic recovery could be bumpy and non-linear due to the health crisis, the worst should be over,” said Sean Taylor.
Julien Marion – ©2023 BFM Bourse