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A woman walks past the Beijing Stock Exchange in Beijing on December 13. 2022 could be a year of redemption for Chinese assets. Photo: Bloomberg
Opinion
Macroscope
by Aidan Yao
Macroscope
by Aidan Yao

Value-seeking investors could make China source of market rally in 2022

  • Affordable valuations and shifting capital will make China attractive as investors seek value in places where asset prices are less expensive
  • People moving their money out of real estate and into financial assets could drive an equity and bond market rally this year
Aidan Yao
Aidan Yao
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Global investors ended 2021 with mixed feelings. While a strong and synchronised economic recovery, coupled with generous central bank liquidity, helped propel markets higher, there are still questions that leave many people apprehensive about what lies ahead.

For a start, Covid-19 is still with us. Not long after its discovery, the Omicron variant has become the dominant strain in many countries, with a record number of infections across Europe and North America. Despite its comparatively mild symptoms, the lack of protection from existing vaccines has forced many governments to return to social and mobility restrictions, hindering consumer spending and travels during the holiday season.

Then there are the issues of inflation and impaired global supply chains. The hawkish message from US Federal Reserve chair Jerome Powell last month indicated a clear policy pivot towards combating inflation pressure that is no longer viewed as transitory.

What could help the Fed in this effort is a faster resolution of supply bottlenecks in areas where price increases have been the most rampant. The latest purchasing managers index numbers in Asia – showing shortening delivery times – and robust export growth of semiconductors are encouraging signs.

However, the jury is still out on the sustainability of these improvements as the raging pandemic could still disrupt production networks in many parts of the world.

Sky-high asset prices are leaving investors with a thin margin of error for their rosy expectations of the future. US and European equities are trading well above historical average valuations, while credit spreads in most developing markets are at near-record lows.

Financial markets are pricing for perfection. This leaves little room for upsetting events such as another disruption from the pandemic, significant central bank mistakes and political or geopolitical conflicts.

Notwithstanding these uncertainties, the outlook appears constructive for the global economy in 2022. The broadening of economic recovery, with many emerging-market countries catching up on production normalisation, should help alleviate supply-chain pressure and normalise prices of semiconductors, shipping containers, raw materials and more.

06:01

There’s a global semiconductor shortage and this is why it matters

There’s a global semiconductor shortage and this is why it matters
This will in turn ease pressure on the Fed and other central banks, allowing them to gently take their feet off the gas pedal without triggering another tantrum, as many fear.
As for the pandemic, the enduring pattern of the past two years – successive outbreaks having diminishing impact on the global economy and markets – is set to continue. Omicron will challenge that view but won’t change it. A continuous move towards “living with the virus” should allow countries to scale back social restrictions and return their economies to normalcy.

Such a benign macro scenario is supportive of risky assets, but high valuations mean 2022 is unlikely to repeat the stellar market performance of last year. Investors could be better off focusing on structural, as opposed to aggregate, opportunities and discovering value in places where asset prices have not become so stretched.

One of these places could be China. Compared to the United States, China is at a different stage of its economic, policy and market cycles. Economic growth in the world’s second-largest economy decelerated worryingly in 2021 amid a combination of virus resurgences, a cooling property market and punitive government policies.

Why are China’s policymakers putting ‘stability’ above all else in 2022?

Assets markets were hit by a double whammy of slowing growth and tightening regulations in 2021, but 2022 could be a year of redemption for Chinese assets. With the risk of a hard landing for the country’s economy rising, the Chinese authorities have started to ease policies.

The recent reserve requirement ratio and loan prime rate cuts, coupled with various fiscal support measures, are signs of a new easing cycle under way. With more pro-growth measures forthcoming, the turning of the policy cycle could help lay the groundwork for a market rebound this year.
A woman walks past an electronic board showing the Hong Kong share index on December 24. Stocks of mainland companies listed in Hong Kong are trading at seven times earnings on average, compared to 28 for the US market. Photo: AP

Also, valuations of Chinese equities and offshore bonds are cheap. Stocks of mainland companies listed in Hong Kong are trading at seven times earnings on average, compared to 28 for the US market.

The credit spreads of many offshore Chinese bonds reflect concerns of policy tightening, particularly in the real estate sector. As so much bad news has already been priced in, investors could find value in some distressed assets as policy headwinds subside.

Finally, household expectations of steadily rising property prices are starting to wane as structural woes in the sector unfold. As more people question property as an investible asset, liquidity could start to flow out of real estate into financial assets. A structural reallocation of household wealth could create a strong impetus for an equity and bond market rally this year.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers

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