While many private banks are bearish on China, Deutsche Bank International Private Bank (IPB) believes now is the best time for clients to dip their toes back into the China market if they have not already done so.
Chinese stocks in Hong Kong and China have been trending lower as the China reopening numbers continue to disappoint and US-China tensions escalate. According to China customs data this week, Chinese exports slumped 7.5% YoY in May, far lower than the consensus had expected.
“China is still very attractive” — Holtze-Jen
“The challenge that we have seen [in China] is the uneven recovery at the moment and geopolitical tensions, and how the West plans to de-risk from China, which again was a topic at the G7 meeting recently,” said Stefanie Holtze-Jen, APAC CIO and head of DPM at Deutsche Bank IPB.
She explained that the worries around geopolitical developments have negatively impacted sentiment and that the ongoing debate around de-risking from China results in a diversification of supply chains away from the country.
“These are the things that are weighing on the sentiment, but I think it’s more the sentiment rather than the macroeconomic backdrop,” Holtze-Jen told Asian Private Banker.
Peak pessimism, attractive valuations
In the short term, Holtze-Jen expects the incoming data from China to show a divergence between the manufacturing and the non-manufacturing side. She believes that whilst the manufacturing orders are subdued due to a lack of demand from the deteriorating economic backdrop in the US and Europe, consumer spending on travel and daily expenses has so far fuelled China’s recovery.
But in the medium and long term, Holtze-Jen asserted that “China is still very attractive”.
“The disappointment about the uneven recovery, the correction of the equities market and geopolitical concerns have led to peak pessimism, which results in more attractive valuations at this moment in time,” she highlighted.
While Deutsche Bank IPB also acknowledges the short-term challenges, Holtze-Jen believes that the better valuations in China now offer more attractive entry levels for a medium and long-term recovery of the Chinese market.
“We prefer adding select exposures instead of staying on the sidelines,” she said, adding that the bank has also been advising clients to increase exposure to China.
“And we have been holding on to exposures that fit into the theme of ongoing recovery. Once the government acts with more stimulus measures, such as a cut of the Reserve Requirement Ratio (RRR), we could see the market bottoming, and sentiment to turn around,” she said.
This week, China has also trimmed deposit rates as it tries to ease pressure on this margin.
Currently, the German lender likes electric vehicles (EVs) in China. Holtze-Jen explained that recent export data proved that EV products not only fulfil domestic demand but show global demand for Chinese cars persists. Total vehicle shipments hit a monthly record of US$9 billion this year.
“Given the [Japanese] equity market rallied meaningfully and valuations have already adjusted upwards, it’s prudent to have realistic targets,” — Holtze-Jen on Japan
Crowded trades in Japan
While Japan is showing momentum, Holtze-Jen argued that investors may want to be cautious.
Given the bank expects a potential mild recession in the US to impact export growth, Japan, which relies heavily on exports, may be impacted.
According to Holtze-Jen, investors should ask whether it is time to chase the rally in Japan. “Given the equity market rallied meaningfully and valuations have already adjusted upwards, it’s prudent to have realistic targets,” she said.
The rally in the Japanese stock market is also linked to the weaker Japanese Yen, and Holtze-Jen suggested that as the Fed is near the end of the rate hiking cycle, the USD will lose some of its appeal.
“We therefore expect USD/JPY to correct lower, which provides an additional headwind.”
Opportunities in a mild recession
The German lender also sees fewer clients interested in time deposits, as the re-investment risk of deposits increases as the market approaches the end of the rate hike cycle.
“We have observed a lot of interest in IG bonds, especially in a recessionary environment. You want to make sure to be invested in high-quality names. As default rates can pick up as we enter recession, and given the attractive returns already for IG, we prefer it over HY bonds.”
The bank expects a mild recession in the US, but with inflation to stay stickier and above the central bank’s target for a more extended period.
“We do not see any rate cuts happening this year, but only in the second quarter next year, which is different to market expectations. Hence, with a Federal Reserve staying on hold longer than expected, higher yields will be around for longer and the IG bond complex attractive for the short and medium-term.”