“As the Chinese year of the tiger begins, the… market is set to really bare its teeth,” says Kate Marshall of Hargreaves Lansdown. In 2008 China accounted for 15% of the emerging market stock index, but its shares have since risen to one-third. “Chinese middle and upper income groups are forecast to expand by over a third of a billion people by 2030,” roughly equivalent to the US population. Not for the first time, Asia looks set to be the “engine of global growth”.
Chinese stocks had a terrible 2021
Despite that, “Chinese stocks had a terrible 2021”, says Jacky Wong in The Wall Street Journal. A regulatory crackdown on education and tech stocks – “Alibaba lost nearly half of its market value in 2021” – combined with a slowing property market saw the large-cap CSI 300 index finish last year down 5%.
Yet 2022 may be better. While most central banks hike interest rates, China has eased monetary policy in recent months to cushion the effects of the property downturn. That should provide a “tailwind” to equities, which look cheap: on 12.1 times forecast earnings, the MSCI China index trades below its five-year average valuation.
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Wall Street is almost entirely bullish, agrees Sofia Horta e Costa on Bloomberg. Marko Kolanovic of JPMorgan forecasts that the MSCI China index will “surge almost 40%” this year. “That bet isn’t going so well.” The CSI 300 fell 7% in January and entered a bear market, having fallen 20% since a February 2021 peak.
The ongoing property market fallout, earnings downgrades and Omicron restrictions are keeping the market subdued for now, says Sean Taylor of DWS. But come the second quarter “targeted government support” will boost growth and should see stocks start to outperform.
Big tech is out of favour
China may also dodge the West’s Covid-19 hangover. While debt has soared elsewhere during the crisis, China’s non-financial-sector debt fell by 7% to 265% of gross domestic product by the third quarter of last year. The “de-leveraging” campaign that has hit the property sector is bearing fruit. “In the last Year of the Tiger, 12 years ago, China successfully overtook Japan as the world’s second-largest economy.” This year could bring a similar leap in markets.
The upcoming Winter Olympics and a busy political year should see Beijing prioritise stability in 2022, says Reshma Kapadia in Barron’s. That “lowers the odds of further dramatic regulatory crackdowns”. Still, “the online businesses, e-commerce companies and gaming” stocks that dominated the last decade are now out of favour, says Pradipta Chakrabortty of investment manager Harding Loevner. Instead, the climate favours smaller firms in sectors such as industrials, healthcare and IT, says Kapadia.
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