Although global markets have seen a recent rally in equities over the past two months, the industry as a whole remains cautious about this outlook as inflation expectations continue to soar and interest rates continue to soar. interest is rising at a record high.

China looked poised to turn the tide, according to Becky Qin, multi-asset portfolio manager at Fidelity International, but several factors dampened her optimism about the country’s recovery from severe lockdowns, which have hurt the economy relative to the approach of Western countries vis-à-vis Covid.

“Earnings guidance has been revised down as activity has come to a virtual standstill in some regions,” Qin said.

“However, as restrictions were gradually eased, there was reason to be cautious with optimism.”

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This included the introduction of intensive PCR testing, which has reduced the potential for further large-scale lockdowns and supportive monetary and fiscal policy that benefits China’s earnings stabilization forecast.

However, Qin noted that recent economic data has “cast doubt on the recovery story.”

“Capital investment, retail sales, private sector credit growth and real estate sales are all going in the wrong direction,” she said.

“The real estate sector in particular is still very weak and the decision by some mortgage holders to suspend payments is increasing uncertainty and is likely to hurt overall equity risk sentiment.

“Even though China’s economic cycle is relatively uncorrelated with other regions, slowing growth in the United States and Europe will hurt Chinese exports.”

China’s property market has recently faced severe headwinds, with investors pricing $130 billion in bond losses as it nears distressed status and an ongoing crisis unless Beijing steps in with a large-scale rescue plan.

Matthews Asia’s chief investment officer, Robert Horrocks, agreed that the national zero Covid policy had been the “dominant challenge” over the past few months, adding that the war in Ukraine had weighed on energy and fuel prices. raw materials.

Alongside the government’s zero Covid policy, investors are also worried about growing geopolitical risk as tensions between China and Taiwan resurface following the visit of US House Speaker Nancy Pelosi. in Taiwan at the end of July.

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He noted that these headwinds had particularly affected China’s domestic economy and companies listed on the A-share market, but said there was cause for optimism.

“China is aiming to improve vaccination rates among its elderly and it’s beginning to transition its pandemic policies,” Horrocks said. “In June, it announced it would halve the required quarantine time for inbound travellers, a policy that has been a major roadblock for overseas businesses.”

“China has such ingrained supply chains that there could be opportunities for companies to raise prices without risking losing important business.”

Horrocks also argued that negative sentiment has led to the sale of companies with “strong cash generation, healthy results and good prospects” alongside weaker companies, which could mean attractive valuations for investors. .

where to watch

The outlook for electric vehicles is “brighter than ever”, according to Ewan Markson-Brown, director of CRUX Asia ex-Japan fund, who claimed that China was building the “cheapest electric vehicle supply chain, the most developed and most innovative in the world”.

“When the Chinese government removed foreign ownership restrictions for new energy vehicles in 2018, it launched a new round of investment from automakers, including Tesla, which culminated in the Shanghai Gigafactory,” did he declare.

Existing internal combustion engine supply chains lack the capacity to support electric vehicles, he noted, adding that China offers “significant opportunities” as companies spring up to produce the materials needed for this new generation of vehicles, including semiconductors.

Markson-Brown recommended Li Auto as one of those potential winners, currently worth $28 billion in enterprise value.

“We believe the company’s focus on analyzing consumer tastes and understanding the trade-offs between spec and cost has allowed them to deliver the best-selling sport utility vehicles,” he said. Explain.

“Focusing on fewer models allows them to focus on increasing volume and lowering prices, which makes its SUVs extremely cost-competitive. It also allows Chinese companies to do what they do best. better, to manufacture high-value goods on a large scale.”

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Darius McDermott, managing director of Chelsea Financial Services, outlined four funds for investors looking to capitalize on the history of Chinese equities.

For those looking for an experienced management team, McDermott recommended FSSA Greater China Growth, which has been led by Martin Lau since 2003.

Despite the challenges of 2021, this fund has consistently produced a 5% return for investors and aims to invest in “quality companies with barriers to entry, pricing power and sustainable growth”.

Allianz China A-Shares offers investors “a true diversifier” with a correlation of only 0.32 with global equities over the past ten years, compared to an average correlation of 0.97 for US equities.

Fidelity China Special Situations offers those seeking small- and mid-cap opportunities through a closed-end product to target emerging companies.

McDermott noted that the trust is able to invest 15% of the portfolio in unlisted companies, but added that this, combined with a bias towards the small segment of the market, means investors should be prepared for fluctuating returns. .

Finally, for investors targeting income, McDermott recommended JP Morgan China Growth and Income, which focuses on large caps and is currently 70% invested in companies beyond the $10 billion market cap.

In addition to the universe of 590 Greater China stocks, the trust can also access the 270 A-shares.

According to data from FE fundinfo, all four portfolios are down year-to-date. The Allianz and FSSA funds fell by 15.3% and 14.2% respectively, more than the sector average which fell by 11.7%. On the closed side, the Fidelity portfolio has lost 16.1% since the start of the year and the JPMorgan trust has lost 17.3%. Average trust in IT in China and Greater China fell 16.2% during this period