This is a sponsored article from J.P. Morgan Asset Management.
China’s consumers unleashed
Capping more than three years of COVID-19 isolation, China’s reopening earlier this year marked one of the most significant events in recent market history.
After a period of transition towards living with COVID-19, consumption activities have accelerated, as evidenced by the rapid recovery in the dispatch of domestic flights and higher spending on entertainment and restaurants. More than three years of pent-up demand and excess savings to the tune of trillions of RMB in deposit accounts could continue to fuel this consumption-led recovery and support business sentiment2. This in turn will have meaningful implications for the outlook of corporate earnings and profitability.
The clouds are clearing for Chinese equities
As it stands, price-to-book multiples of Chinese equities are near historic lows, as illustrated below. Relatively undemanding valuations alongside the nascent economic recovery and a decisive shift towards a growth-friendly policy stance could continue to support the outlook of China’s equity markets.
Relatively undemanding valuations and China’s consumer-led economic recovery could buoy the outlook for domestic equity markets.
Source: Bloomberg, FactSet, MSCI, J.P. Morgan Asset Management. Data as of 28.02.2023. Dots represent monthly data points since 1996, the first full year for which data is available. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met. Past performance is not indicative of current or future results. Indices do not include fees or operating expenses and are not available for actual investment.
Chinese equities present diversification opportunities from the US and Europe
More broadly, Chinese equities can also present diversification benefits for portfolios. For one, given China’s relatively distinct economic and policy cycles, its onshore equity markets have historically exhibited low correlation with developed markets.
In a year where growth concerns loom large for developed economies due to high interest rates and tightening financial conditions, China’s growth is expected to remain well supported given the commitment of policymakers at the National People’s Congress in early March to boost the economy. And while persistently high inflation keeps developed market central banks mired in a tightening posture, lower inflation and relatively elevated policy rates suggest meaningful room for further policy stimulus in China.
Furthermore, in line with China’s decreasing dependence on the US and Europe as key export markets, the bulk of revenue exposure for the MSCI China Index is domestically driven, as illustrated below. This implies relatively lower vulnerability to the economic headwinds facing the developed world4.
A significant share of MSCI China’s corporate revenue derives from the domestic market, with limited exposure to the US and Europe.
Source: FactSet, MSCI, J.P. Morgan Asset Management. Data reflect most recently available as of 31.12.2022. Past performance is not indicative of current or future results. Indices do not include fees or operating expenses and are not available for actual investment.
Secular growth themes receive a cyclical boost as China reopens
Cyclical tailwinds aside, China’s economic reopening could provide a boost to long-term structural growth themes, spanning technology, consumption and carbon neutrality1. Companies with lean cost structures and strong pricing power are particularly well suited to ride the reopening trend, in our view1.
- Consumption
China’s consumption-led economic recovery may benefit consumer-sensitive sectors such as tourism and retail markets. Growing affluence and an expanding middle class will continue to support the ‘premiumisation’ trend while industry consolidation in some areas can help compound growth.
Meanwhile, robust healthcare spending and investments will drive opportunities in areas such as medical equipment and structural outsourcing, including contract research organisations (CROs) and contract manufacturing organisations (CMOs).
- Technology
Consumption recovery, better corporate sentiment and easing regulatory pressure could help to boost the appeal of selective internet and consumer discretionary names that are aligned to the government’s general policy direction.
Software companies have been riding the digitalisation trend, aided in part by the government’s support for the creation of domestic champions.
Automation and other productivity enablers in the industrial and technology sectors are key beneficiaries in the drive to boost growth through productivity gains, in the face of a ‘greying’ workforce and rising wages.
The continued focus on import substitution, self-sufficiency and national security will help buoy the growth of strategic sectors such as semiconductors.
- Carbon neutrality
Sectors supporting the development of a “Green Economy” such as electric vehicles (EVs), solar and advanced manufacturing are likely to play a key role in generating sustainable growth over time3.
Rising EV penetration, stricter emission controls and standards, and faster adoption of renewable energy could continue to support revenue and earnings growth of related segments.
Additionally, the EV supply chain and renewable energy sectors — such as solar power supply chains, installation, and storage — present other interesting opportunities. This is particularly important considering that China continues to take global market share in solar production.
Harnessing on-the-ground expertise to seek out enduring opportunities
In general, investors globally remain underinvested in the onshore Chinese equity markets relative to the size and importance of the Chinese economy. As such, there is plenty of scope for the growth of foreign investor participation in Chinese markets. But seeking equity opportunities in China should not simply be a passive endeavour.
Tapping enduring investment opportunities in the world’s second largest economy requires robust fundamental research and rigorous bottom-up stock selection. Being on-the-ground is crucial to truly understanding the underlying businesses and the dynamics of China’s equity markets which, while broad and liquid, remains inefficient with a high level of pricing anomalies. Ultimately, active management is key to navigating a year of major policy shifts and macro changes in China’s economy.
To that end, J.P. Morgan Asset Management is a leading specialist in the Greater China markets, with a dedicated Greater China team of 25 investment professionals, with an average of 18 years’ industry experience, alongside a robust track record of seeking quality growth opportunities in China’s equity markets5.
As of March 2023. This information is based on current market conditions, subject to change from time to time without prior notice. Provided to illustrate macro and asset class trends, not to be construed as research or investment advice. Investments are not similar or comparable to deposits. Investors should make independent evaluation and seek financial advice. Risk management does not imply elimination of risks. Forecasts/ Estimates may or may not come to pass.
Diversification does not guarantee investment return and does not eliminate the risk of loss.
1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
2. Source: “2023: The rainbow after the storm”, J.P. Morgan Asset Management, December 2022.
3. Source:, “China market: buoyant market sentiment along a bumpy road to recovery “, J.P. Morgan Asset Management, 13.12.2022.
4. Source: “The spillover effects of China’s reopening”, J.P. Morgan Asset Management, 10.01.2023.
5. Source: J.P. Morgan Asset Management, data as of 28.02.2023. There can be no assurance that professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that past performance or success of such professionals serve as an indicator of the professionals’ future performance or success.
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This is a sponsored article from J.P. Morgan Asset Management.
