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Chinese assets 2022 outlook: fragile credit and volatile A-shares

The value of Chinese stocks listed in the US fell by a trillion dollars after Didi’s delisting news, signaling a bearish sentiment, but some investors eye opportunities.
Chinese assets 2022 outlook: fragile credit and volatile A-shares

Amid regulatory pressures and the uncertainty of a post-pandemic world, investment managers believe investors should be cautious about Chinese stocks in the next 12 months, while remaining alert to opportunities.

“The equity market has seen a differentiation between new economy and old economy, and the market is still debating on how the post-pandemic world would look like: living with the new normal or back to the pre-pandemic level. In the longer term, we should consider these uncertainties and how the market will react to it,” according to Fang Jun, vice president at China Life Insurance, who shared his 2022 outlook for Chinese assets on the Insurance Asset Management Association of China website.

Fang Jun,
China Life Insurance

Fang believes sectors' performance of A-shares will continue to remain differentiated, market volatility will increase, and corporate profits may fall. “It is necessary to select policy-friendly stocks such as dual carbon, common prosperity, and supply chain assets,” he said.

BUY IN DIP?

Regulatory uncertainty has put Chinese stocks under pressure. The value of those listed in the US lost a trillion dollars after Didi’s delisting news, and investors have been cautious over Hong Kong-listed Chinese stocks, particularly those in the property, technology and education sector.

However, some investment managers believe that the drop in valuations presents opportunities in select stocks. 

"The recent corrections have driven down share prices and have given us valuation signals in select stocks that look enticing on a multi-year basis. We find some attractive names not just among the internet stocks but also in other areas of technology such as hardware, for example semiconductors, supported by China’s ongoing push for self-sufficiency," Rebecca Jiang, Greater China equities portfolio manager at JP Morgan Asset Management, told AsianInvestor

Rebecca Jiang, JPM AM

Jiang also emphasises other investments are worth exploring in China, not just tech.

"For example, recently we have been buying select consumer staples stocks on dips. We are confident that consumption will continue to grow over the medium and long term, as consumers become wealthier and more discerning, and believe that well managed companies with strong brands and channel controls can pass on input cost inflation. Healthcare is another area which offers attractive secular growth opportunities," she added. 

Indeed, according to a recent Invesco outlook piece, Chinese equities valuations are attractive and trade at a discount relative to global equities.

Investors should focus on grasping structural market conditions, increase dynamic adjustments in equity allocation, and focus on mid- to long-term prosperous industries, according to Fang.

“Policies in 2022 and beyond, branded under the broad objective of common prosperity, will continue to impact equity markets. Investors should surf through these policies and ride on tailwinds to find attractive opportunities,” Mike Shiao, Invesco's CIO echoed in the report.  

Source: Invesco

ALSO READ: Foreign holdings in China A-shares soar 30 times under Stock Connect

CREDIT WORRY

There are certain vulnerabilities in the credit market, especially the debt situation of real estate companies.

"The risks have not been fully reflected. These risk factors will also trouble the credit market. However, credit risks will be treated as individual cases, which will not lead to industry-specific and systemic risks but will cause fluctuations in the credit bond market," said Fang.

“Regarding fixed-income assets, if long-term interest rates continue to rise, positions can be appropriately increased. The leveraged arbitrage strategy of credit bonds is still effective, and attention should be paid to the longer-duration bonds issued by high-quality entities,” he noted.

The recent default of property developer China Evergrande Group is an “individual case and will pose little impact on the market”, the country's regulatory authorities said last Friday.

The overseas US dollar bond market is quite mature with well-defined legal provisions and procedures on how to deal with relevant issues and its investors are good at-risk identification, said an official from the government, who added: "The risks caused by a certain individual real estate firm in the short term will not undermine the fund-raising function of the market for the medium and long run."

ALSO READ: Evergrande has defaulted, some say

Fang Jun’s views are personal and are not those of China Life Insurance

¬ Haymarket Media Limited. All rights reserved.
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