Chinese equities had a bumpy ride since the start of the year, as concerns over COVID related lockdowns could dampen the domestic economy.
Externally, inflation and rate hikes in western countries also led to weaker sentiment. However, with easing of domestic COVID restrictions, improvement in economic data and the easy monetary bias, Chinese equities have recently rebounded and outperformed global peers.
We believe that, with the emergence of these catalysts, Chinese equities may see a sustained rebound especially with a relatively attractive valuation.
While the Fed has started to hike interest rate, China, on the other hand, has cut its lending rate and lowered banks’ reserve requirement ratios. We expect a further reduction in the policy and reserve requirement rates.
The divergence in the monetary policies, in our view, is constructive to Chinese equities. The rebound of May credit data is a combination of growth and credit demand recovery, given the strong policy response and easing COVID restrictions Effects of the easing policy should be even more evident in the 2H.
Chinese authorities have reiterated their stance to support growth, domestic recovery and employment this year In particular, on the internet side, there are signs that the worst is over for regulatory tightening The Chinese government has pledged more robust policy support for platform economy and technology sector, which signalled an end of structural policy reform in 2 years.
One of the catalysts for valuation re rating would be the regain of confidence in China’s ‘ sector With Chinese authorities reiterating their stance on supporting growth, domestic recovery and employment, we believe that the worst is over for regulatory tightening
Asia is in a stronger financial position to weather potential macroeconomic headwinds, a comparison of exports growth, after COVID this time, to the Greater Financial Crisis in 2008 Tech Bubble Burst in 2000 and Asian Financial crisis in 1997 showed that exports growth is 30% stronger. Second, Asian governments’ balance sheets are much healthier.
Emerging Asian countries also demonstrated solid financial strength, e.g., Indonesia has recently recorded the biggest capital account surplus in ten years, thanks to its solid commodity exports. Despite the pandemic, over the recent years, Asian households have built their wealth, excess savings and disposable income. Despite COVID, we have seen excess savings and further accumulation of wealth from Asian households helped by mobility restrictions in the last two years In Korea, we have seen savings of 8 1 of house annual disposable income during 2020 2021 which is higher than historical average.
China’s zero COVID policy has successfully combated COVID since the outbreak’s start. Asian countries, one of the largest trading partners with China with a share of 17 and 15 of export and import, will not be immune Korea and Taiwan are most exposed. COVID restrictions have been lifted in most parts of the region.
For example, Thailand now allows quarantine free travel (since June), and Singapore has reopened its border since April With a significant portion of their GDP coming from tourism and related sectors, Thailand and Singapore will likely benefit from reopening.
The relative price to earnings ratio (PER) valuation discount for Asian equities compared to US equities provides a better valuation cushion for Asian equities in the face of global macro headwinds. The valuation gap is evident Asian equities are now trading at around 30% discount to the US.