With Chinese New Year just around the corner, AsianInvestor asked managers what's in store for financial markets across Greater China -- mainland China, Hong Kong and Taiwan -- over the next 12 months.
The Year of the Wood Dragon, which begins on February 10, is believed to usher in a time of change and transformation, rapid activity and a good dose of unpredictability.
So will the New Year bring good news for markets, especially after a challenging Year of the Rabbit?
We asked four investment specialists for their take.
The following responses have been edited for brevity and clarity.
Michele Barlow, head of investment strategy and research in Asia Pacific
State Street Global Advisors
As global growth decelerates and China struggles with deflation, the Greater China region faces an uncertain market environment in the Year of the Dragon.
While equities across the region look attractive from a valuation standpoint and market sentiment remains weak setting up a potential near-term recovery for equity markets, China continues to be leaning into growth headwinds while geopolitical uncertainty could see volatility remain high.
From a risk-adjusted return standpoint, we believe bonds look more attractive. As global deflation continues to broaden out, central banks should start cutting rates.
Hong Kong bonds, in particular, are set to benefit from Fed rate cuts as Hong Kong moves in lockstep with the US. There is less room for Chinese bonds to rally with yields near two-decade lows, but they should remain well supported.
We continue to like gold as it offers portfolio diversification, given its low correlation to other asset classes, and it can help to protect portfolios against systemic market shocks and tail events.
As 2024 is fraught with potential fracture points, particularly around territorial conflicts and geopolitically critical elections, gold can provide a good tail risk hedge.
It has a strong track record of protecting against both short- and long-term market volatility.
Yigit Onat, head of multi asset in Asia
HSBC Asset Management
For Chinese assets, perhaps it will not so much be the Year of the Dragon, but more the year of his close cousin in the mythological pantheon, the Phoenix, as Greater China emerges from the ashes of the real estate funding crisis.
The most obvious places to look for growth opportunities remain in the themes where there is potentially explosive growth: electric vehicles, alternative energy and of course, the Taiwanese semiconductor companies, which could enjoy further tailwinds from the AI [artificial intelligence] revolution and the improved chip cycle.
But in 2024, this is mixed in with the intriguing prospect for genuine bargain hunting as sentiment towards some Chinese markets reaches historic lows.
Even in the real estate sector, there may be opportunities for specialist distressed debt investors to ride on any improvement in likely recovery values for individual companies in the offshore bond market, while some of the traditional economy stocks trading in the Hong Kong and mainland China, dragged down by the malaise in more ‘exciting’ sectors, could present outstanding opportunities to value investors.
The Chinese sovereign and high quality RMB bond market has enjoyed good returns as yields edge downwards, and this could continue as more monetary support is provided in the form of increased liquidity and interest rate cuts.
Michael Dyer, investment director, multi-asset
Hong Kong and Hong Kong-listed Chinese equities are emerging as particularly compelling.
Firstly, valuations have significantly declined, now standing at levels below previous market lows, thereby trading at historically unprecedented discounts compared to other equity markets.
For instance, the Hang Seng Index is currently boasting earnings yield of nearly 14%, and the HSCEI is nearing a 16% yield, in stark contrast to the S&P 500's yield of 5%.
Furthermore, recent market trends exhibit a pronounced pessimism in narratives surrounding Hong Kong and China equities, indicating a potential capitulation in their holding.
This sentiment mirrors the situation observed in October 2022, which preceded a substantial rally exceeding 50%.
Admittedly, these markets harbour both tangible and perceived risks.
Nonetheless, we are of the view that the enticing valuations coupled with the prevailing investor capitulation provide a substantial margin of safety for initiating tactical positions within broader multi-asset portfolios.
Moreover, from a portfolio diversification standpoint, Hong Kong/China equities can offer a unique hedge, moving asynchronously compared to other equity and bond markets which are predominantly influenced by the anticipated Federal Reserve policies and interest rate trajectories.
Mike Kelly, global head of multi asset
In China, the new economic pragmatism which emerged since November 2022 continues.
A moderate cyclical recovery still appears to be unfolding in China, although 2024’s growth rate may still be dragged down somewhat by private property construction, which will not be completely offset by stepped-up construction of public housing and urban development.
Recent meetings of the Politburo and the Central Economic Work Conference have signalled that fiscal support is intensifying and will play the leading role, with monetary policy only in a supportive role.
The People’s Bank of China is showing signs of gradually stepped-up monetary easing, notably with the issuance of 350 billion yuan in pledged supplementary lending to support essential projects.
Nevertheless, additional monetary easing is vital to stabilise the housing market, a key component of consumer confidence. Delays in monetary policy adjustments risk a gradual descent into a balance sheet recession.
National security remains a priority for Chinese officials. This is particularly evident in China’s strategy to promote the yuan as a primary currency for trade with the Global South, which constrains their monetary policy.
The swift adoption of the yuan could reduce risks related to potential US restrictions on accessing the dollar-based banking system.
Opportunities are nevertheless present as China slowly addresses its property issues, valuations may appear highly attractive once this is behind.