Why should we be investing in China?
Published on 11.02.2022
Will “the year of the Tiger” turn into “the year of the bull”? We expect the Chinese stocks and bonds markets to offer investors higher rates of growth at favorable valuations.
2021 was a disappointing year for investors in China with losses in both equities and stocks due to the economic downturn.
In 2022/2023, we expect the onshore Chinese market to gain ground. It may even be the world’s most “growthy,” with stocks and bonds favorably valued and offering investors higher rates of growth.
© Vontobel 2022
Investing in China in 2022 and beyond: following the downturn in 2021 have we now reached a turnaround? Three investment and Emerging Markets experts present their estimates on the Chinese markets.
Summary: The main points at a glance
- In 2022/2023, China’s equity market will most likely offer higher growth at more favorable valuations reflecting the policies being put in place to stimulate economic growth.
- Although, 2022—the year of the Tiger—will probably be volatile, so investors who are prepared to ride out any initial turbulence should find attractive opportunities for entering the market.
- Companies with Chinese origins are rapidly becoming more profitable relative to other countries—they now represent a large percentage of the most profitable companies in the world.
- China’s onshore corporate bond market is the biggest single-country market in the Emerging Markets bonds universe. Yield expectations are regarded as being “too attractive to ignore”. Its onshore market is the world’s most “growthy” market, offering more opportunities for stock selection than Hong Kong-listed stocks because it is more diversified and is second only to the US bonds market.
Further themes in the video
- Currently, demographics represent a major headwind for the Chinese economy with a shrinking labor force and attempts at increased productivity hampered by regulatory measures. 2021’s policy tightening is expected to bottom-out in 2022 in the lead-up to the party congress and this will create investment opportunities.
- Chinese policymakers are focusing on a return to a stable growth path giving new impetus with supportive and flexible monetary policies—in contrast to the US, interest rates are being lowered and the money supply expanded in order to accelerate economic growth.
There are signs of further regulation of sectors responsible for increasing living costs in a move aimed at the fairer distribution of prosperity i.e., economic growth. Also targeted support for some sectors including, for example, environmental technologies and electrical vehicles is an encouraging sign.
As their capital markets become more accessible to foreign investors, China’s weight in e.g., the MSCI Emerging Markets will expand. That will automatically lead to an inflow of investment from passive investors, but will also attract the attention of more active investors.
Interview on this theme with one of our strategists
Three questions on equities and commodities
Stefan Eppenberger, why is China so pivotal when it comes to trends in the global financial markets?
I would cite three reasons here. The most important, of course, is the fact that the Chinese economy is expanding. Depending on the evaluation method used—adjusted for purchasing power or not—China is already the largest national economy in the world. BIP growth in China may be declining, but the Chinese share in global economic growth has been the highest over the last few years. That is impressive—so it is only logical that if China gets sick, so do the global economy and the financial markets.
Which asset classes are most dependent on China?
Those in the financial markets whose economies are most closely linked with the Chinese economy. Logically, Asian assets suffer more when the Chinese economy slows down. Financial markets, such as the German equities market, with a high percentage of firms who export to China are also exposed. In addition, commodity assets are sensitive to economic changes in China. For example, China consumes over 50 percent of the most important industrial metals.
“Investments in commodities are sensitive to economic changes in China”.
You mentioned a third reason for the increasing significance of China …
Yes. As the Chinese economy grows, so do Chinese companies. The Chinese equities market is already the second largest in the world based on market capitalization, but it is not investable for everyone abroad. This should change and Chinese shares are likely to make up over 50 percent of the emerging markets equity index by mid-decade. The bonds universe is also made up more and more of China. As an investor, there is no longer any way around Chinese titles. Thus, we and our investments are gradually becoming more and more dependent on China.
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