Wealth management houses take a look at the next 12 months and what the economic and investment world holds.

The Chinese New Year – the “Year of the Tiger” – kicks off this week. To mark the start of this year, here is a selection of commentaries from investment firms and wealth managers.
 

Eric Zhang, portfolio manager, Asia and head of tactical positioning, global balanced risk control, Morgan Stanley Investment Management
“Within emerging markets, we think Asia will do better in 2022. One reason is that restriction measures due to the pandemic have continued to decline, paving the way for gradual reopening and recovery of economies. This is because Asian markets have a larger population that is vaccinated compared to Latin America and  EMEA. In addition, Asia has a decent growth backdrop, as governments in the region have the ability to implement policies to support growth where needed.

"As we progress to the latter part of the year and when we pass through the Omicron variant wave, the global economy will continue to recover and that will have a varying impact on emerging markets. For example, slowing commodity growth and inflationary pressures are likely to impact emerging markets that are closely linked to commodities, such as Latin America. Asia, on the other hand, [it] tends to be a commodity importer, and the region consists of more diverse sectors, meaning it will likely benefit as the world begins to normalise."

DWS – comments from the firm and from one of its senior figures
”China dealt with the economic fallout from COVID well, which led to positive asset prices in 2020. However, 2021 was an extremely challenging year for Chinese asset prices as the People’s Bank of China tightened monetary policy and put in more regulation in the education and internet sectors,” Sean Taylor, chief investment officer APAC, DWS, said.

Growth was dampened further in the year as a zero COVID policy held back consumption, over-leveraged property companies struggled to pay their debt, and the country faced a shortage in power supply. In addition, the Chinese government announced a shift in policy priority away from growth at all cost towards common prosperity.

Shortly after the beginning of the new lunar year the Beijing Winter Olympics will commence. Both events should boost consumption in a usual year. However, the lack of spectators and worries over increasing Omicron cases have led to a resurgence in lockdowns and slower consumption. Earnings expectations are still looking too high given economic growth predictions and this is likely to accelerate earnings downgrades in the first quarter. In addition, there is still a heavy redemption schedule for bonds in the property sector.

“China is following a completely different path than the rest of the world," Taylor said. He noted the development of government debt: In China, unlike in the US and Europe, there have been no major government support programmes since the Corona crisis started. Credit availability and private consumption fell significantly. But what was negative for economic development in the short term could pay off in the medium term. While debt rose dramatically in industrialised nations, borrowing from the future, it fell by 7 per cent to 272 per cent of gross domestic product in China last year. China has not borrowed so much from the future like the US and Europe.

China is also following its own agenda when it comes to interest rate policy. While the US and many of the Emerging Market countries are on a path of tightening or normalising policy, the People’s Bank of China is easing policy. Credit growth should improve and investments in infrastructure should pick up to mid-single digit levels. Once evidence of growth comes through, regulation concerns ease, and consumption starts to pick up, investors' confidence should turn positive. The shift towards common prosperity should lead to less but higher-quality growth that benefits a broader part of the population and lower dependence on property and infrastructure investments to drive growth.

Another positive development that should pay off in the long run is China's commitment to climate neutrality."

After a difficult year, Taylor still thinks that China is investable for foreign investors. However, investors need to be patient and selective. There could be further setbacks in the first quarter, before the situation should improve in the second quarter. In equities, Taylor favours stocks focused on the domestic consumer with good brands, new electric vehicles, batteries, and industrials sectors. Taylor thinks that positive earnings revisions, successful regulation implementation and recovery in consumption, could be positive catalysts for driving upsides in Chinese equities.

Bestinvest – comments from the firm and one of its senior figures
The year of the Ox, which according to the Chinese lunar year began on 12 February 2021, was a painful one for investors in Chinese equities. The Ox symbolises strength and determination, traits certainly in evidence in the Chinese authorities’ single-minded approach to economic and financial management, as well as the pandemic, and its sabre-rattling towards Taiwan. 

Beijing’s zero-tolerance policy on COVID-19 and its crackdown on the technology and education sectors last year, spooked investors whose nerves were already frayed by debt worries in the property sector, as symbolised by the Evergrande crisis.

“All this uncertainty contributed to a grim year for Chinese equities and unsuspecting investors who might have been lured into China funds by the spectacular gains of 2020,” Jason Hollands, managing director, said. 

“While the MSCI China Index notched up an impressive total return of 25.7 per cent in 2020, in 2021 it slumped – 20.9 per cent. Worse still, since the Year of the Ox began on 12 February 2021 it has tanked -34.5 per cent (as of 27 January 2022). And Chinese ‘growth’ stocks have had a particularly brutal run with increased state interference in big tech companies: the MSCI China Growth Index is down -43.3 per cent since the same date.  

“Holders of emerging markets funds will have witnessed the impact, given China is the largest country component of the index, although active managers have taken steps to reduce their exposure to Chinese equities. China represents 31.4 per cent of the benchmark MSCI EM index (as at 31 December 2021) – down from a peak level of about 43 per cent the year before.  

“But the average Global Emerging Markets fund is underweight with 28.1 per cent exposure, according to data provider Morningstar,” he said. 

“China’s monetary authorities meanwhile are cutting rates amid concerns over drags on economic growth. Analysts believe that fears around the deepening property market slump and weak consumption amid sporadic COVID-19 outbreaks will lead Beijing to further monetary easing this year. While supportive for domestic growth, this does present a currency risk with the dollar likely to appreciate significantly against the yuan/renminbi,” Hollands said.