Schroders, one of Europe’s largest independent money managers, with US$939 billion of assets under management as of June 30 2022, has become the latest to switch to a buy for Hong Kong/China stocks. It joins a raft of other funds that have taken a similar stance as 2023 rolls around.
For its top-10 predictions for 2023 published this week, Keiko Kondo, head of multi-asset investments, Asia, at the firm, says she has gone long Hong Kong and mainland Chinese versus emerging market equities. “Supported by liquidity and growth, Hong Kong and mainland Chinese equities stand a good chance of outperforming its peers, especially emerging markets,” she believes.
Her stance is similar to the view of David Chao, global market strategist, Asia-Pacific (ex-Japan), at Invesco, which has US$1.3 trillion of assets globally at the end of September 2022. “We have long maintained that China’s gradual reopening would likely be preceded by another vaccine campaign targeting seniors and a shift in the Covid messaging,” he points out. “We believe that investors are already starting to see the light at the end of this long Covid tunnel in China. Despite near-term market volatility, we are more optimistic about Chinese risk assets for 2023, given low valuations and an economic upswing led by a controlled reopening next year.”
At Federated Hermes, headquartered in Pittsburgh, Pennsylvania, with US$1.4 trillion of assets under advice as of the latest quarter, Jonathan Pines, its head of Asia ex-Japan, notes that recent developments in the mainland have caused some investors to finally throw in the towel. “The key risk we are concerned with remains geopolitical – China’s relationship with the US – rather than domestic policy driven concerns,” he wrote in the fund’s 2023 outlook.
“Chinese stock valuations are now probably at a record low relative to the rest of the world, with Chinese stocks listed in Hong Kong trading on a PE (price-earnings) multiple of approximately six times. Very substantial risk has been priced in as investors focus on what could go wrong in China. However, things could also go right,” he argues. “We consider Chinese stocks to be too cheap. There are admittedly potentially geopolitical near-binary risks that might hurt investors investing now despite current cheap valuations. However, on a probability-adjusted basis we consider it a risk to be more than priced in and well worth taking.”
PineBridge, for its 2023 Investment Outlook, notes that “the outcome of China’s 20th Party Congress did not proffer hopes for a growth-oriented policy pivot, and while moving toward more collective ownership and centralized control will likely slow China’s growth over time, 2023 may buck the longer-term growth trend.”
It adds that the “government has unveiled new, less-disruptive zero-Covid policies, including steps that will ultimately pave the way for a reopening, and just reloaded support for private property developers – changes that may lift China’s economy as the year unfolds. If so, China will be one of the few accelerating economies in 2023. The longer-term weight of greater state control appears more than fully priced in to asset valuations, presenting a potential counter-trend opportunity in 2023”.
At research and investment bank Jefferies, Desh Peramunetilleke, global head of microstrategy, relates that the firm has been underweight China for most of 2021 and then turned neutral in the second quarter this year. “Our hope of a cyclical recovery seems to be coming through along with a valuation mean reversion. We think that the November rally is still in the nascent stage, as news flow will likely remain positive.”
He expects this to dovetail into the Covid reopening theme, and implying that investors cannot be underweight China going into 2023. “While the falling MSCI weight of China in the Asia-Pacific ex-Japan index is unlikely to revert back to past highs, for long-term investors, we see opportunities that are free of common prosperity and tech war issues.” He believes that “any China Covid lockdown weakness should be used as an opportunity to accumulate. In contrast, avoid last year's winners in Asean, India and Australia”.
BofA Securities echoes the general consensus that what happens in China next will have plenty to do with its Covid approach. “In our view, the dominant question for China's growth in 2023 is how Covid controls will be eased. Indeed, it has been our long-held contrarian view that controls would be relaxed after the 20th Communist Party Congress. That now seems to be happening, with the Politburo signaling a change in tone and NHC (National Health Commission) rolling out a number of relaxation measures. This implies a domestic demand rebound as China reopens, even without substantial easing in monetary, fiscal, or property policies.”
It adds that Hong Kong is a good example of how that reopening can happen and provides a feasible path towards normalized activities. “The city, which imposed a strict Covid-zero policy until 1Q22, managed to reopen in about three quarters, via vaccine mandates, at-home quarantine and testing as well as gradual changes in social distancing measures. Hong Kong's experience also warns against missteps, such as the belated vaccination push and poor communication to manage public expectation.”
Hong Kong’s Hang Seng Index, which shot up by more than 28% the past six weeks, is indicative of the changing investors’ sentiment. Meanwhile, the Hong Kong dollar, which has been trading at the weak end of the band of between HK$7.75 to HK$7.85 to the US dollar for most of this year, has strengthened just as the Chinese yuan, which is now trading slightly below 7 against the US dollar.
